When Will Home Prices Go Down?

Photo by Kostiantyn Li / Unsplash

I recently came across these two charts on Ben Carlson’s blog, A Wealth of Common Sense.  He took them from Lance Lambert at ResiClub.  This first chart draws a striking comparison between home price appreciation in the decades of the 90s, 00s, 10s, and the first 50 months of the 2020s.   

From the look of things, we have experienced a decade’s worth of appreciation in just four years. Great news for homeowners, bad news for would-be first-time homebuyers. 

Does That Mean Prices Are Going to Go Down Like They Did in the 2000s?

Not likely. During the years of the mortgage crisis (2007 -2009), home prices fell because a huge supply of inventory hit the market when upside down borrowers couldn’t refinance their debt or afford their monthly payments. Banks took over the properties, and they were selling homes for whatever prices they could get.  Even qualified buyers had a hard time getting financing, so supply went way up, and demand went way down.

That same scenario is unlikely today.  Most existing homeowners are locked into conventional fixed mortgages with rates of 4% or less. And looking at this second chart, nearly 40% of homeowners don’t have any mortgage at all. If prices were to drop, they don’t need to move and probably wouldn’t have any reason to list their house at fire sale prices. 

On top of that, some of the price increases we have seen are the direct result of inflation.  Real estate assets today have higher replacement costs than they did a few years back.  Materials cost more and construction workers require higher levels of pay, so even if there was a huge increase in home building, it is hard to imagine prices coming down too far on a national level. Things could, and likely will, vary greatly from one local market to the next. 

Can Prices Keep Going Up?

Absolutely! While we would expect home prices to level off or rise at a much slower rate for the remainder of the decade, anything is possible.  Home price appreciation in the first four years of the 2000’s was very much like the appreciation we have seen since 2020.  And from 2004 - 2007 home prices went on to gain another 40%.  I wouldn’t expect the same appreciation today – I would hope we have learned from our previous mistakes – but people do funny things, and the markets can stay irrational longer than any of us can stay solvent. 

Moral of the Story

If you are looking to buy or waiting to sell because you think real estate will continue to appreciate at the same rate it has been climbing once the Fed starts lowering rates, I suggest tempering your expectations.  Prices don’t go straight up forever and given enough time, whether dealing with stocks, bonds, or real estate, prices will eventually revert towards the mean.