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Waiting for Home Prices to Drop? Bad Strategy

No discounts. (Photographer: Bloomberg)

With mortgage rates  retreating from their highest since 2002 and the US housing market cooling, some buyers are expecting to get a deal next year instead of having to contend with sky-high home prices. Unfortunately, that’s just wishful thinking.

Although most economists think rates have peaked — or close to it — the consensus is that rates will hover around 6.5% or 7% for 30-year fixed mortgages for the foreseeable future.

And on home prices, there’s no reason to think we’ll see big declines any time soon. I surveyed half a dozen economists to find out where home prices are headed in 2023. By and large, most are anticipating prices on average to stay within 5% of where they are now.

One of the most bearish scenarios foresees a 20% drop in prices in 2023. But even analysts who expect a drop of that magnitude think it would be spread out over several years.

That’s little consolation for those who had hoped a big decline in home prices could soften the blow of mortgage rates that have doubled over the last 10 months. Consider this: To keep mortgage payments at the historical share of household income (about 18%), home values would need to drop 39% from where they are currently, according to Zillow.

That’s not happening. Inventory is just too tight. Homebuilders haven’t built many new houses and many existing homeowners don’t want to sell and trade their low mortgage rates for higher ones.

Nor are homeowners being forced to sell as they were in 2008. Just 1% of realtors said they were working with distressed sellers, according to a recent survey by the National Association of Realtors. That compares with 49% of realtors who were doing so in 2009.

There are also now more young middle-aged adults (“elder Millennials”) eager to buy. That will help to keep home prices propped up, says Len Kiefer, Freddie Mac’s deputy chief economist. That’s another key difference with the early aughts, when there just weren’t as many homebuying Gen X’ers, the smallest generation.

Still, there may be markets where a bigger drop is coming. Think areas where homes are expensive, such as San Jose (down 11% from its peak already) and San Francisco, or those that had a big run-up in home prices during the pandemic, such as Austin, Boise and Phoenix, according to Redfin. Other regions, such as the Midwest and Northeast, are unlikely to see price declines, if any. 

Before homebuyers completely despair, there are a few helpful things to keep in mind. While affordability may not be changing much, there is less competition for homes. Right now, there are an average of 2.4 offers for a house compared to 5.5 offers earlier this year.

Sellers aren’t going to slash prices, but they are realizing that they have to make more of an effort to attract buyers — like spending money to freshen up their homes, says Jessica Lautz, deputy chief economist for the National Association of Realtors. For buyers, less competition means they don’t have to deal with some of the craziness of the last couple of years, such as losing out to other bidders who were willing to waive home inspections and make other big concessions.

Ultimately, it’s first-time buyers who are most likely to feel the weight of home prices staying elevated. That’s because they’re the ones who have to come up with the funds for a down payment. As hard as it may be, giving up on what could have been is the first step. It’s better to refocus search parameters and make peace with buying a cheaper home, perhaps farther from work or a fixer-upper, rather than hoping for the market to nosedive or rates to come down.

Existing homeowners, especially those who have lived in their homes for a while, have likely benefited from home price appreciation and can use proceeds from a sale for their down payments. As such, mortgage rates — not home prices — are often a bigger deal for homeowners looking to move. And unlike with the price of a house, there are options to reduce one’s rate — from adjustable-rate mortgages to refinancing if rates fall.

But a homebuyer can’t bank on rates falling. If you’re worried about the monthly payment, make a bigger down payment if you can, or pay an extra point or two (which is a fee paid to the mortgage lender) to effectively buy the interest rate back down.

Ultimately, when searching for a house, buyers should expect home prices and mortgage rates to be more or less where they are today.

More From Bloomberg Opinion:

• Looking to Buy a House? It’s Not the Worst Time: Teresa Ghilarducci

• Renters Are Finally Catching a Break: Conor Sen

• A Tip for Unmarried Couples: Romance Has a Bottom Line: Erin Lowry

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.

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