For just about any homeowner, talk of falling housing prices can spark panic. With homeownership being the major financial and personal investment it is, there’s a natural anxiety that comes with any potential threat to that investment.
On a national scale, housing market activity has started to show a year-over-year decline in home prices. Between Feb. 27 and March 26, the median home price was $361,000, down 2% from the same time in 2022, according to Redfin.
But prices aren’t dropping everywhere, and the size of decline varies widely from market to market. “A lot of this question around price is so localized right now. Now there’s just so much variation,” says Lisa Sturtevant, chief economist for multiple listing service Bright MLS.
Home prices are impacted by the long and rapid ascent of prices throughout the coronavirus pandemic, high mortgage interest rates compared to previous years, low housing inventory and economic uncertainty on a larger scale. Many would-be homebuyers are simply opting out of a purchase now.
In many cases, properties on the market sit a bit longer, and sellers are dropping their asking prices more often than during the previous two years, when buyer activity was red-hot and dropping a listing price was almost unheard of.
[READ: When Will the Housing Market Crash?]
To help you better understand the data, we’re breaking down the different kinds of price drops, declines and decelerations you may hear about, as well as what this means for home prices now and in the future.
— What do dropping prices mean?
— Are home prices dropping?
— Where are home prices falling?
— What will happen to home prices next?
What Do Dropping Prices Mean?
When you hear about home prices dropping, it can mean one of a few different things. Clarify which type of dropping price it could be:
— Listing price drops or price cuts. If a house is sitting on the market and not getting much interest, the listing agent and seller will likely have a conversation about dropping the home’s asking price. When you see more listing price drops on a larger scale, it’s a sign that a tight seller’s market is easing up and potentially starting to favor buyers. Listing price drops often coincide with longer median days on the market. In March, listing price cuts increased more than 132% year over year, but are still down compared with September and October 2022, the most recent peak for dropping listing prices, according to HouseCanary Inc., a valuation-focused national real estate brokerage.
— Deceleration of sale price increases. In some markets, home sale prices are still higher than they were a year ago, but at a much slower rate than previously. In the second half of 2022, Redfin reports the national median home price was still higher than it was one year prior at any point in time, but the size of that increase continued to get smaller as time went on.
— Month-over-month home price declines. If the median home sale price in June was lower than in May, for example, that’s considered a declining month-to-month price. However, because of the largely seasonal nature of the housing market, month-to-month numbers are often considered too volatile to indicate changing trends unless placed into a larger context.
— Year-over-year home price declines. If the median home sale price in March 2023 was lower than in March 2022, the median price has experienced a year-over-year decline.
— Declining home values. A declining home value occurs when the appraised market value is less than the price a buyer paid for it. A homeowner is only underwater if the market value of the home drops below the amount owed on the property through mortgages or other liens. “If you gain 40% (in home value) and your price comes down 5%, you’re still well ahead,” says Nick Bailey, president and CEO of Re/Max.
Are Home Prices Dropping?
On a national scale, home sale prices have declined year over year, but are rising month over month. HouseCanary reports the median price of closed listings, or the sale price, for the week of March 24 was $390,987, a 3.9% year-over-year decline compared with the same week in 2022. Month over month, closed listing prices rose 4.1%.
HouseCanary also reports the median list price for homes active on the market is up year over year to $425,998. The difference between the list and closing prices indicates a bit of a divide between seller expectations for their home value versus what buyers are willing — or able — to pay. “It’s a little bit of a disconnect in that especially on the year-over-year side of things,” says Chris Stroud, cofounder and chief of research for HouseCanary.
The median days on market in September also increased 18 days year over year to 54 days, according to realtor.com. The change may feel significant compared to early 2022 and 2021, but the median days on market is still below any point from 2017-2020.
Still, housing prices on the larger scale are experiencing less of a steep downward slide than many may have worried about before. “Even with the huge increase in interest rates over the last 12 months, the low inventory has really been a bolster to prevent (a bigger drop in prices),” Stroud says.
That also means it’s likely the traditional spring homebuying and selling season will be milder in 2023 compared to recent years. “I don’t know that we’re going to see the typical surge of new listings for spring because so many sellers are locked into low mortgage rates,” Sturtevant says.
Where Are Home Prices Falling?
Looking at current market trends and looking ahead, expect more varied results between different parts of the country.
“Those areas that took the highest level of appreciation, those are the places that are down,” Bailey says.
For example, San Francisco, a famously expensive place to own a home, had a median home price of $1,322,500 in February, an 11.2% decrease compared with February 2022, according to Redfin.
These price decreases reflect a market price correction — a period of time in which home prices fall to reflect where prices would be had there not been a period of rapidly paced growth.
Austin, Texas, saw rapid price increases before the pandemic began, during which home prices entered warp speed. Redfin reports the median sale price in the Austin market in February was $540,000, a 5.3% year-over-year decrease.
But these bigger market-specific price declines are slowing as well. In February, both San Francisco and Austin experienced month-over-month price increases — the first time that had happened since September 2022 for San Francisco, and since May 2022 for Austin, according to Redfin data.
“There have definitely been some markets that have experienced a pretty sizable correction,” Stroud says. “Even those markets have seemed to stabilize going into spring.”
On the other hand, there are also plenty of markets that have continued to see moderate year-over-year price growth. Boston saw a 3.1% increase in home prices year over year in February, with a median of $732,000, according to Redfin.
[READ: Why You Should (and Shouldn’t) Sell Your Home in 2022.]
What Will Happen to Home Prices Next?
With many contributing factors, there’s no guaranteeing what will happen next in the real estate market. Prices may continue to decline year over year, they may plateau for a period of time or they may begin increasing again.
The fact that many homeowners have opted not to sell at this time — in many cases to avoid taking on a higher mortgage interest rate for the next home they would purchase — is one of a handful of factors that seem to be keeping changes to home values relatively slow-paced.
Expect to see the narrative change across different markets, however. Sturtevant says she expects some markets to continue to see a decline in prices compared to a year ago, but “there’s a whole swath of markets across the country where we’ll see prices continue to rise.”
Even if prices drop more, homeowners can worry less about becoming underwater on their homes. The average homeowner equity — the portion of a home’s value that the homeowner has beyond any mortgages or other liens — saw a net gain of 7.3% year over year in the fourth quarter of 2022, according to CoreLogic’s Homeowner Equity Insights report. That makes a homeowner’s average equity gain more than $14,300 over a one-year period. This marks a stark drop in the amount of equity gained each quarter in 2022, as homeowners gained an average of $63,100 in equity in the first quarter of the year. However, an equity gain of that size is massive, and shouldn’t be expected to continue long-term, as it’s unsustainable.
“While equity gains contracted in late 2022 due to home price declines in some regions, U.S. homeowners on average still have about $270,000 in equity, nearly $90,000 more than they had at the onset of the pandemic,” said Selma Hepp, chief economist for CoreLogic, in the fourth-quarter report released in March.
The share of homeowners with negative equity — or those who owe more on their home’s mortgage than it is worth — also decreased by 2% year over year in the fourth quarter of 2022, according to CoreLogic.
This high amount of equity provides some cushion for homeowners, decreasing the chance of short sales, foreclosure and other distressed sales that were all too common in the Great Recession. That cushion can provide homeowners time in the event that they can’t make monthly mortgage payments. Fortunately, that’s not the case for most homeowners right now.
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If the U.S. were to enter a recession that sparked large amounts of job layoffs, with homeowners selling their homes out of necessity or facing foreclosure, that’s when home prices could see a significant decline. However, Stroud notes current conditions don’t point to that scenario. “Outside of that situation, I don’t see a big decrease in prices here over the next 12 months or more,” he says.
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Why Are Homeowners Seeing Prices Drop? originally appeared on usnews.com
Update 04/06/23: This story was published at an earlier date and has been updated with new information.
