Home prices are finally falling. But how low will they go?

The American housing market is in the midst of a major change. After two years of stratospheric price appreciation, home prices have peaked and are on the way back.

But what homebuyers and homeowners alike want to know is: How much lower will prices go?

The short answer: Prices will likely fall further, but not as much as they did during the housing bust. From the 2006 peak to the 2012 trough, national home prices fell 27%, according to the S&P CoreLogic Case-Shiller Index, which measures U.S. home prices.

“It was different in 2008, 2009 because the price drop was due to a push from sellers,” said Jeff Tucker, senior economist at Zillow. “Because of foreclosures and short sales, there were a lot of extremely motivated sellers who were willing to take a loss on their homes.”

Also, that housing crash came at a time when the inventory of homes for sale was four times higher than it is now. Current inventory remains significantly below pre-pandemic levels, which has increased competition for housing. And that keeps prices relatively strong.

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“I would be surprised to see prices fall anywhere below what they were in 2019,” Tucker said. “There was some overheating in the housing market in 2021 through this spring that pushed prices higher than the fundamentals would support. Now they’re coming down.”

With mortgage rates more than doubling since the start of this year, the calculations for a home buyer have changed significantly. The monthly principal and interest payment on the median-priced home is up $930 from a year ago, a 73% increase, according to Black Knight, a mortgage data company.

When you factor in skyrocketing mortgage rates, along with inflated home prices and wages that aren’t rising as fast, buying a home is less affordable now than it has been in decades, according to Black Knight.

But there may be some relief in sight for buyers.

Economists at Goldman Sachs expect home prices to fall about 5% to 10% from their peak in June.

Wells Fargo recently forecast that national median home prices will decline 5.5% year-over-year by the end of 2023.

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Wells Fargo economists estimate the median price of an existing single-family home to be $385,000 this year, up 7.8% from last year, but growth will be much smaller than the 19% year-over-year increase in 2021.

Economists expect the median home price to fall to $364,000, down 5.5% from this year. They predict that prices will recover and rise again in 2024, with the median price ticking up 3.3% to 376,000 by the end of 2024.

“The primary driver of the housing market correction thus far has been sharply higher mortgage rates,” the Wells Fargo researchers wrote. “If our forecast for the Fed’s rate cuts is realized, mortgage rates are likely to fall somewhat just as cooling inflationary pressures boost real income growth. A modest improvement in sales activity should then follow, resuming home price gains towards 2024.”

How much prices drop ultimately depends on where you live.

Unlike the surge in prices during the pandemic that sent home values ​​in markets across the country soaring, the cooling will be more regional, Tucker said. The drops will be felt more deeply in places where there were bigger gains during the pandemic, many of them in the West and Sunbelt, including cities like Austin, Phoenix and Boise, he said.

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“Nationally, we could see a 5% decline from the peak,” Tucker said. “But prices will fall more in the west and there will be a smaller decline in the southeast.”

In September, home prices fell 2.3% month over month in several pandemic hotspots, including Phoenix; Las Vegas, down 1.9% and Austin, down nearly 1%, according to Zillow.

And Boise, Idaho, where prices rose nearly 60% during the pandemic, is already seeing annual declines, with prices falling 3.9% year over year in September, according to Zillow.

“A number of metro areas, particularly in the West, will see some year-over-year price declines this spring,” Tucker said. “That will be the worst comparison period because that’s when many markets peaked.”

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