The Reason Home Prices Fell for the First Time in a Decade
Housing prices dropped in February 2023, and a decade-long streak was just broken.
Average home prices in February 2023 were lower than February 2022 — the first time since 2012 that home prices declined on a year-over-year basis.
Home prices have been steadily ticking upwards for over a decade; but, due to a combination of economic factors, including inflation and high interest rates, prices have finally begun to crumble, and they might have further to fall.
Let’s see what is driving this change and how much further prices might drop.
How Far Did Home Prices Drop?
According to the National Association of Realtors survey, median home prices dropped 0.2% from February 2022 to February 2023. The median home price in America was $363,700 in February 2022, but it dropped to $363,000 in February 2023.
The pricing correction is location-driven. While the Midwest and South are still enjoying modest annual price increases of 5% and 2.7%, both the Northeast and West saw significant pricing drops.
The Northeast median housing price was $383,300 in February 2022, but it fell 4.5% to $366,100 over the past year. And the West fared even worse, with a median house price of $573,200 in February 2022 dropping 5.6% to $541,100 in February 2023.
These price drops correlate with an overall increase in the average time on the market for homes, indicating a slowing housing market and more pressure on sellers to drop prices.
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Why Are Home Prices Dropping?
Several factors are causing home prices to drop. From an increase in mortgage rates to the recent run-up in housing prices over the past few years, the market is finally cooling off. Here are the main reasons for the price drops.
Interest Rates
Two years ago, 30-year mortgage rates hovered around 3%; today they are above 6.5%. This massive increase in rates in a short amount of time is historically significant and hasn’t been seen since the 1980s.
The effect these rate increases have had on housing affordability is massive.
For example: A $400,000 house with a 3% rate has a mortgage payment of $1,686 per month. But the same house at a 6.5% interest rate would cost $2,528 per month.
The same house now costs $842 per month more — an additional $10,104 per year in payments.
This has caused many households that could have qualified at lower rates to not be able to buy homes in the previously approved price range, causing less demand in the market.
Inflation
Inflation has been hitting everyone, and home prices are one of the biggest areas that have increased over the past few years. Low interest rates, along with economic stimulus, increased demand to the point that many houses were seeing bidding wars, sometimes increasing the prices $100,000 from the original asking price.
This type of inflation even caught the eye of White House officials, causing them to release a statement to explain why housing was getting so expensive.
The Federal Reserve’s goal of squashing inflation is starting to work. But the housing market has been slower to respond. Housing prices shot up as buyers wanted to lock in mortgages before rates got too high; but, since the rates are now much higher than last year and the Fed is not pivoting yet, home prices finally are coming down to meet the lower demand of the market.
Layoffs
There have been over 300,000 layoffs in the tech sector alone since 2022 — and hundreds of thousands more at other companies. And in a recent GOBankingRates survey, over 30% of respondents said they are “worried to very worried” about losing their job.
This same survey also reported that 29% of people don’t have more than $500 saved for emergencies, which would make a layoff that much more devastating.
Those factors, along with decreasing home affordability, have caused the housing market to soften. It’s hard to consider buying a home when you’re worried about your employment. If you were laid off, you might be hard-pressed to sell your home and downsize to cover basic expenses, which means lowering the price to meet the lower demand in the market.
How Far Will Housing Prices Drop?
This may be a tipping point for housing prices, with many more months of price decreases ahead. But, at the same time, inventory on the market remains low, so current owners aren’t in a hurry to sell their houses, especially if they locked in rock-bottom interest rates.
The housing price drop will be determined by (1) the willingness of sellers to lower their prices to sell, (2) the Fed rate policy moving forward and (3) the amount of qualified homebuyers willing to buy at today’s prices.
Most indicators point to a continued correction in the housing market, with prices dropping even more. But that could easily change if the Fed decides to lower rates.
Will Housing Become Affordable Again?
Housing affordability has become a major issue in 2023. Many cities are projected to price out buyers quickly, with increases of 20% per year. The median home price already has increased by 18% since 2020, with many regions seeing much higher increases over the past few years.
So will houses ever become affordable again?
With the recent downturn in housing prices, there is some hope, but economic conditions don’t point to a major housing crash (yet). With very low unemployment, inflation starting to drop and the possibility of the Fed lowering rates in the future, it remains to be seen how housing prices will be affected going forward.
Bottom Line
Housing prices are dropping, but not by a lot. With inflation causing a bit of a housing bubble that is now popping, and interest rates cranking up to highs we haven’t seen in nearly 15 years, there is still some room for prices to drop further. But there are several factors involved in home pricing, and some regions aren’t even seeing the prices drop yet.
If you are in the market for a home, make sure to work with a competent Realtor who knows your area well and can help you find the best deal available, even if that means waiting a little bit longer.
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