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- Even as demand plummets, extremely low supply will likely keep prices from falling significantly.
- Prices have started decreasing somewhat, as high mortgage rates keep demand low.
- Most major forecasts predict that home prices will end 2023 between 4.2% lower and 0.3% higher than they were a year ago.
The unprecedented, dizzying home price growth we saw over the past three years has left many would-be buyers priced out of the market, wondering if they'll ever get priced back in.
Prices have started inching down a bit in recent months, and while some experts predict that we'll see larger corrections or even a bursting market bubble, most major forecasts predict that home prices will only fall modestly in the coming months and years.
Will home prices drop in 2023?
On a monthly basis, home prices have been decreasing since July, according to the S&P CoreLogic Case-Shiller Home Price Index. But compared to this time last year, prices are still up by more than 6%.
Real estate is an appreciating asset, which means that home values typically increase over time. Though they do drop occasionally, like they did during the Great Recession, prices have historically trended up.
During the pandemic, prices increased at a much faster rate than they have in the past. From Q1 2020 to Q1 2021, the median home price increased more than 14%, according to data from the Census Bureau and the Department of Housing and Urban Development. For comparison, prices increased just 5% from 2019 to 2020.
For 2023, many forecasts expect that home prices will decelerate and may only drop slightly. Here's where some of the major industry players currently think home prices will end up this year:
| Forecast | Home price change |
| Fannie Mae | -4.2% |
| National Association of Realtors | 0.3% |
| Mortgage Bankers Association | -0.6% |
Looking even further ahead, the Mortgage Bankers Association believes that prices will drop another 1.2% in 2024 before starting to recover by 2025, ending the year 2.1% higher.
Why are home prices so high?
Home prices, like a lot of things, are driven by supply and demand. During the pandemic, demand for homes shot up, pushing prices higher.
Demand was helped by two things: the fiscal stimulus provided to households during the pandemic, and low mortgage rates driven by Federal Reserve policy. People had more money to spend and put toward a down payment on a house, while low rates boosted their buying power.
Low supply only made affordability worse. Short-term trends may have played some part in this, since many sellers delayed listing their homes during the pandemic, either due to COVID concerns or out of a reluctance to enter a frenzied market as a buyer.
Together, these forces caused home prices to climb up at an astonishing rate. Now that they're so high, many are wondering if they'll ever come back down. But because supply is chronically tight, any drops we see will likely be relatively moderate.
The US has a big housing supply problem
Doug Duncan, the senior vice president and chief economist at Fannie Mae, says most analysts believe the lack of supply has driven the dramatic price increases we've experienced over the past few years.
"Starting back in 2015, house prices since then have been appreciating at significantly faster than the long term average," Duncan says.
In its 2021 research note "Housing Supply: A Growing Deficit," Freddie Mac estimated that the US was 3.8 million units short of a healthy housing supply. The problem is especially pronounced when it comes to entry-level homes.
There are two main ways to add to the housing supply: listing existing homes for sale, and building new ones. Part of the problem is that the baby boomer generation is holding onto a lot of real estate, and they aren't leaving their homes to live in retirement communities or assisted living facilities at the same rate previous generations have.
"Right now, the boomers are doing what they said they were going to do, which is aging in place," Duncan says.
That's not to say it's a bad thing that older adults are able to remain independent for longer, often thanks to advances in technology and telehealth, but it cuts off a key source of inventory that isn't added elsewhere. When younger adults sell their homes, for example, they're typically also looking to buy another, increasing turnover, not supply.
The bigger problem is that new homes aren't being constructed at a fast enough pace to meet demand. According to the Freddie Mac research note, "the main driver of the housing shortfall has been the long-term decline in the construction of single-family homes."
Duncan says that the Great Recession destroyed around 75% of the housing supply chain. During this time, nobody was building houses, so a lot of workers exited the industry, and many businesses shut down.
The supply chain is still recovering from this, and after decades of underbuilding entry level homes, builders are having a hard time meeting demand for affordable inventory.
Will mortgage rates cause home prices to drop?
As mortgage rates increased rapidly in 2022, home buyers struggling with affordability were priced out of the market. Fewer buyers naturally meant less demand, which can impact the rate at which home prices appreciate.
Mortgage rates rose over three percentage points last year, according to Freddie Mac, adding hundreds of dollars to the average monthly mortgage payment. But so far in 2023, rates have been falling, and they're expected to continue going down.
Lower mortgage rates have already started to have an impact on demand. In December, pending home sales increased for the first time since May, according to the National Association of Realtors. However, they're still down nearly 34% year-over-year.
As we head into the spring buying season, it's likely that current mortgage rate trends will encourage more buyers to enter the market, boosting demand. This could push home prices up slightly, or at least keep them from falling further.
Is now a good time to buy a house?
So, is now a good time to buy a house? Duncan says that his answer to this question is the same now as it was 20 years ago: If it fits your budget, it's the right time to buy.
"Because you don't know whether interest rates are going to go up or down in the long term, and you're simply making a housing decision, as opposed to an investment decision," he says.
For most people, it's not about trying to time the market.
"A lot of us are just buying a house to live in and take care of our household and family and all that," Duncan says.
If you're waiting for prices to crash before buying, you should probably rethink your strategy — while it's possible the housing market could crash, it currently isn't very likely.
Waiting to buy could be a smart move if you're looking to save on interest, since it's likely that mortgage rates will continue to drop this year. But if you need to buy now, you could still save money by opting for an adjustable-rate mortgage, or by refinancing into a new mortgage once rates have dropped.