When Will Real Estate Prices Go Down?

Halo Group Real Estate Advisors Blog

Slowing home-price growth is a worry for many U.S. homeowners. While prices continue to rise in many areas, their increased rate has slowed considerably. In the best of situations, housing market forecasts are daunting. In times of exceptional market volatility, they are practically impossible. So, when will real estate prices go down? Several house experts and analysts believe home prices may drop considerably through 2022 and beyond.

'Mile High' Market Trends

In the past month, researchers from Moody’s Analytics recently shared their predictions for home prices in major cities across the U.S. They estimated how house values are likely to change during the two-year period from Q4 2022 – Q4 2024 in 414 major U.S. housing markets. The results were a mixed bag. The company sees home prices falling in some parts of the U.S. while continuing upward in others.

Among the nation’s 414 largest housing markets, Moody’s Analytics forecast model predicts that 210 markets are poised to see house prices decline over the coming two years; 204 markets are poised to see house prices rise over the coming two years. The Denver metro housing market has shifted to a more balanced market, with home buyers feeling more hopeful than just one or two quarters ago.

“We are no longer in a shifting market. We have shifted, and the real estate market is more balanced,” says Andrew Abrams, Chair of the Denver Metro Association of Realtors, in the latest DMAR Market Trends Report. “One of the primary indicators of a shifted market is the close-price-to-list-price ratio, which was down to 100.81 percent. We see this every weekend as buyers become more specific about what they are looking for and frequently question if and how much below the asking price they can offer. I expect the close-price-to-list-price ratio to decrease under 100 percent as the months continue, which translates to more patience and realistic expectations needed by sellers.”

Market Insights

  • The number of homes on the market in July topped 7,300 — a 22% increase from June and an 81% spike from a year ago, according to the association’s latest market trends report for release today.

  • The number of closed sales decreased 21% from the prior month, and the number of average days on the market is now 13 (a 30% increase).

  • Another primary indicator of a new landscape is that homes are closing at their list prices.

  • There are still 2,000 fewer homes for sale compared to three years ago. 

  • Many sellers are starting to offer buyer incentives such as rate buy downs and HOA fee prepayments after seven days in the MLS instead of price reductions. 

  • 5280’ magazine’s ranking of the best neighborhoods evaluated all 78 Denver communities, considering home values, school quality, safety, and distinctive aspects that set a place apart. The top five neighborhoods were Wellshire, Belcaro, Washington Park, Platt Park, and City Park. 

  • Mortgage demand hit the lowest point since 2000, according to the latest DMAR Report.

What is Bringing Prices Down?

Since 2000, the growth in median home prices has dramatically outpaced median income. Home prices have risen 159% cumulatively over these 21 years, for an average annual increase of 4.7%. Income has only grown 15.9% cumulatively during the same timeframe, for an average annual gain of only 0.7%. During this time, the average annual increase in median home prices has greatly exceeded the 2.5% average annual gain in the CPI, while median income has lagged behind the CPI.

Over the past two years, the disparity was even more extreme. From 2020 to 2022, median home prices increased 14.5% per year versus a 4% per year increase in median income. CPI averaged 4.4% for the period.

Rising Interest Rates

Mortgage rates have risen to the highest they have been in 13 years. Since the beginning of the year, mortgage rates have climbed 2.19 %. This is the most significant 5-month increase in four decades.

When mortgage rates increase, mortgage applications decrease as more buyers—especially first-time buyers—are priced out of the market. The housing sector is the most interest rate-sensitive segment of our economy. Rising rates will inevitably slow the number of homes sold in the coming months. This will result in lower prices.

Rising Inflation

Inflation increases the prices of goods we buy and housing costs. Several other factors come into play when considering how much a house will cost, like building material expenses, the city’s cost of living, and even just how popular it is to live in that area.

Housing demand goes down as other expenses rise and potential homebuyers are priced out of the market. Supply and demand influence prices. Even if inflation is high, an oversupply of housing will bring home prices down.

Predictions for the Market

August saw a 21.5% increase in active listings, while pending and closed deals decreased throughout the month. Furthermore, days in the Multiple Listing Service (MLS) lengthened by 30 percent last month. Every indication points towards a market shift to a buyer’s market. 

“The question frequently asked is, “Are we in a bubble? Prices are high, interest rates feel high, the economy has dipped, and buyer sentiment is down. Even with all those uncertainties looming over potential buyers, a housing bubble should not be one of them,” says Abrams. “Any change naturally causes hesitation as buyers and sellers attempt to realign reality with expectations. This will continue throughout the year, which will impact our housing market. Prices may go down, and days in the MLS may go up; we are still far away from a bubble.”