Yes, (some) house prices are about to fall. Here is where. – Forbes Advisor

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Danielle Riley was a rookie real estate agent in 2007, just as the housing market began to crash and trigger the 2008 financial crisis. In her hometown of Rochester, New York, home prices plummeted 20 % over the next few years, while the country has been in an even worse real estate recession for almost six years.

The national median home sale price peaked at $234,080 in June 2006 before falling 33% to a low of $156,000 in February 2012, according to data from Realtor.com.

“I have a hole in my stomach thinking about subprime [mortgage] crash,” Riley says, referring to mass defaults on high-cost home loans issued to borrowers with weak credit. “I was in my early twenties and working on commission. It was a very, very difficult time for salespeople and real estate agents.

Although the housing market is performing differently now, she feels uneasy as the market emerges from the Covid-19 pandemic with new pressures on house prices.

Strange days for the housing market

Riley held on after the real estate crash 15 years ago, and she now runs Better Homes and Gardens Real Estate Prosperity in Rochester as a landlord broker.

Having been through all kinds of real estate cycles, Riley says the current cycle is the “weirdest” she’s seen. Sellers and their realtors got used to nearly two years of hunting for the best price on homes as buyers were willing to spend almost anything to win against multiple offers during the tightest housing inventory market. Of the history.

But that appetite took a turn when mortgage rates soared this year, reaching as high as 5.81% at the end of June, nearly double the average of a year ago, according to Freddie Mac. According to the National Association of Realtors, the typical mortgage payment in July was more than 50% higher than it was a year ago.

And that leads to the “strange” market that RiIley refers to – many buyers are being financially exploited in the market, but sellers (and their agents) are still looking at sales comparable to the height of the market just a few months ago and believe they can go for the same now.

“You can look at the compositions. You can have it appraised. You can ask the best real estate agent in the world to tell you what he thinks it’s worth. But at the end of the day, it’s only worth what someone else thinks it’s worth,” says Riley, acknowledging that house prices are likely to fall. “Unfortunately, that’s how the world works.”

Why house prices are likely to fall

The housing market over the past two years has been among the most bubbly in ages. And while what goes up in the markets doesn’t always go down, it usually reverts to the mean.

This is exactly how Skylar Olsen, chief economist at Zillow, portrays the current moment. Zillow predicts that annual home value growth will decline from the current rate of 16% to 2.4% over the next 12 months – and some areas of the country will see an actual decline in home values.

“At the national level, this strong long-term trend averages out,” Olsen says. But “there will be markets that will experience a pullback.”

As home values ​​drop, prices will likely follow because people prefer to pay at or below what a home is worth.

Areas that have seen some of the biggest increases in valuations are among those expected to experience declines over the next year. Zillow’s forecast calls for a 3.6% decline in home values ​​in San Jose, Calif., and a 1.8% drop in those in San Francisco by next July.

Prices in oil towns are also expected to fall: the model shows Shreveport, Louisiana, and Odessa, Texas, with declines of 3.3%.

Cities set to see steepest declines in home values ​​through July 2023

Cities expected to see biggest increases in home values ​​through July 2023

However, Olsen cautions that there has rarely been a harder time to model price changes. The global pandemic pushed borrowing costs to low levels, only to quickly reverse them as house prices hit record highs.

“We are entering a period of major transition,” says Olsen. “I think how dramatic this moment is, how big the changes are.”

How Mortgage Rates Stuck the Boiling Housing Market

Mortgage rates have long taken a back seat to other major home buying costs as the average 30-year fixed-rate mortgage remained below 4% from mid-2019 to March of this year. It wasn’t until April, when rates topped 5% for the first time in 11 years, that buyers really started to worry about the cost of mortgage rates again.

The market is “so rate driven” now, says Alex Pettee, president of Hoya Capital Real Estate, which manages two exchange-traded real estate funds. “What’s been a little overlooked on the upside is the impact of the rate cut.”

The 30-year fixed-rate mortgage climbed to 5.81% on average in June, but has since fallen to 5.55% as of August 25, according to Freddie Mac. Most economists predict that mortgage rates will bounce back into the 5-6% range for the remainder of the year and continue to weigh on house prices.

“If rates stay in the high 5s or low 6s, I think that’s going to be a tough environment,” Pettee said. If it stays in the mid to high 5%, “I think that’s a level the market can handle.”

Related: Compare current mortgage rates

Like many other pundits, Pettee isn’t worried about a repeat of the subprime crash. Borrowers haven’t stretched financially like they did a decade ago, and the overall macro environment continues to support healthy demand, he says.

“There could be sluggishness without a meaningful correction,” says Pettee.

If the housing market slows, should I buy now or wait?

It’s a question many homebuyers who didn’t take the plunge at the height of the market ask themselves: is now a good time to buy?

Every housing expert – from the Zillow economist to a Rochester real estate agent to a Wall Street investor – agrees that as long as you plan to be in your newly purchased home in the next few years, regardless of whether prices stagnate or decline somewhat in the short term.

“You can buy, and prices can be low for the next two years, and then the long-term momentum kicks in,” Olsen says.

Work with an experienced agent in your area of ​​interest, especially one who’s been through all the different phases of the housing market, says Riley. Also, make sure your lender and your personal budget calculations take into account the possibility of your property taxes increasing after the home closes, especially in markets where home values ​​are rising.

Experts advise homebuyers not to get caught up in dire predictions, forcing them to wait for a real estate crash that may never happen, or at least not to any significant degree.

“To time the market is really, really difficult,” says Olsen. “If you find the property you want to stay in for a while, I would still consider moving forward.”

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