When will house prices go down?

Housing affordability hit an all-time low in 2023, as mortgage rates continued their steady climb and inventory stalled. While a housing market equilibrium remained elusive, the market crash that doom-mongers projected never materialized — and home prices began to grow in the second half of the year. Such uncertainty has left many asking: When will house prices go down enough to stabilize the market?

Projections have been all over the map for 2024, with industry leaders forecasting growth in home prices as high as 6.5%, and declines by as much as 3.5%. The year ahead is likely to be another wild ride for the housing market, but if 2023 was any lesson, low inventory is likely to help keep home prices slowly growing or close to where they are now.

Are home prices going down?

Home prices fell nationally at the start of 2023 and are down compared to 2022. However, home prices grew in the second half of the year, showing promising signs that the drip in home values is behind us.

In Q4 of 2022, the national median sales price for homes peaked at $479,500, according to the U.S. Census Bureau, before prices dipped to $418,500 in Q2 of 2023. Since then, prices have steadily risen, topping $431,000 in Q3 of 2023 (the most recent quarter data is available at the time of publication).

 While home prices are down in most parts of the country compared to 2022, the growth in the second half of the year has proven that the market remains resilient against the strong headwinds of high mortgage rates. In fact, home prices grew year-over-year in over 80% of surveyed metro areas in Q3 of 2023, according to the National Association of Realtors.

→ Learn more about whether now is a good time to buy a house‍‍

Will home prices drop in 2024?

The push and pull of high borrowing costs against low inventory will likely continue to cause home price volatility in 2024.

Forecasts for home prices have varied widely across the industry's leading players. Moody’s forecasts the home prices to fall by 3.5% by the end of 2024, while the National Association of Realtors expects home prices to rise by 2.4%, and Zillow expects them to rise by as much as 6.5%.

Under normal circumstances, low housing affordability would be expected to bring down the price of homes, as the market adjusts to reduced demand. However, the US remains in a severe housing deficit, keeping supply scarce and driving up the cost of homes. No one knows exactly how these factors will play out, but, the resilience of home prices in 2023 suggests that the continued inventory crisis will likely keep home prices close to where they are now if they don’t grow slightly.

‍Related: Should I buy a house during a recession? Are we in one now?

Why is it so hard to predict home prices?

Ultimately, the housing market is in a crisis of uncertainty. Here are the major factors driving it:

• Interest rate hikes: When interest rates go up, so does the cost of mortgages, which dampens demand. Less demand means less competition for houses, motivating sellers to cut costs. This is one factor that is driving down prices in some markets today.
• ‍"Locked-in" homeowners: More than 80% of current mortgage holders have an interest rate of less than 5% – significantly lower than current ones. This has created a "locked-in" effect, where many potential home sellers aren't selling in order to keep their low mortgage rates. This has exacerbated a longstanding inventory shortage and continues to drive home prices up.
• Recession reduces demand: Fears of a recession continue to spook the market. Although home values generally continue to appreciate during recessions (with the notable exception of the 2007 financial crisis), a declining economy puts pressure on financial resources, which could reduce demand in the same way interest rate hikes do. This could also cause sellers to lower home prices.

→ Here are our market predictions for 2024

What happens when home prices don’t drop

The sky-high trajectory of home values has meant record equity gains for homeowners — topping $27.8 trillion nationally in June 2022. However, it has also spurred on an affordability crisis.

As home values have risen, the affordability of houses has continued a steep downward trend. The Housing Affordability Index, which measures the ease with which a family with a median income can qualify for a mortgage on a median-priced home, shows just how much housing affordability has suffered.

In the graph above, a value of 100 means that a family with a median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. The last time that the index was at or above 100 was April 2023, when mortgage rates were in the mid-five percent – nearly two whole points less than they are today.

Since it is unlikely that mortgage rates will drop below 6% until 2025, a dip in home prices or a market correction brings the promise of affordability equilibrium.

How will house prices going down affect me?

The changing market will impact buyers, sellers, and homeowners differently. Here’s how the market may impact you:

Homeowners

Homeowners who have enjoyed double-digit rates of appreciation may be worried about their home equity as the market goes through this period of transition. However, it’s important to remember that appreciation is only one factor that drives home equity — so does paying down your mortgage and investing in high ROI projects for your home.

While the single-digit appreciation forecasted for 2024 is nothing compared to what it was in the early 2020's, homeowners can still expect modest gains.

Homebuyers

Homebuyers need a break. With affordability at an all-time low, a dip in home prices is exactly what homebuyers need. However, prices are unlikely to drop as low as needed to fix the affordability crisis.

However, prospective homebuyers can expect more flexibility in asking prices with less competition for homes. Additionally, incentives offered by homebuilders for new construction homes can help bring down the costs of buying and give homebuyers the edge they need to buy in 2024.

Home sellers

Home sellers are stuck in a triple bind: they want healthy competition for their home sale but don’t want their home price to drop. Plus, they want the next house they buy to be affordable.

Thanks to the record appreciation of 2021 and 2022, homeowners who have owned a home for several years are likely to have accumulated enough equity to afford a dip in home prices. In fact, such a dip could make their next home purchase more affordable and help maximize the proceeds from their home sale (since many home sellers use their proceeds as a downpayment on their next home).

In an environment where housing affordability is a challenge for buyers, people looking to sell in this market should set a competitive listing price that reflects the changing landscape and be prepared to wait. Median days on market is on the rise and is expected to continue as the market normalizes. Don’t be concerned if your house is on the market for longer than a month — this is a sign of the market returning to a healthy balance. 

Still worried? Consider this: The lowest median days on market in 2019 was 56 days, and 2019 was considered a seller's market.

When will the housing market recover?

Inventory remains the greatest challenge of housing affordability today. If you want to know when home prices will drop, the question you need to first answer is when will inventory increase.

→ Learn more about the cities with the most new construction homes.

FAQs

More answers to your questions about when house prices will go down.

What factors influence fluctuations in house prices?

House prices are primarily influenced by the balance between supply and demand, with high demand and limited housing supply driving prices upward. Larger economic factors, like interest rates, employment levels, and income growth, also play a significant role, as they affect consumers' purchasing power. Additionally, regional factors like population growth, local amenities, and housing regulations can further impact house prices in specific areas.

What are the leading indicators of a housing market downturn?

Leading indicators of a housing market downturn typically include rising interest rates, a significant increase in housing inventory, and a slowdown in home sales. When central banks raise interest rates, it can affect mortgages rates (pushing them up), reducing the number of qualified buyers and slowing down demand. An excessive supply of homes on the market can also signal a downturn, as it often leads to price reductions and longer time on the market. Finally, a decline in the number of homes being sold, especially when combined with increasing inventory, suggests a shift in market dynamics that may lead to lower prices.

How long does a housing market downturn typically last?

The duration of a housing market downturn can vary widely depending on various factors, including the underlying causes and the effectiveness of policy interventions. Historically, downturns in the housing market have lasted anywhere from a few quarters to several years. The severity and duration of a downturn can be influenced by economic conditions, government policies, and regional market dynamics, making it challenging to predict an exact timeframe for recovery.