Are House Prices Going to Drop?

One of the most common questions I’ve been asked over the past few months has been:

“Are house prices going to drop?”

Or more accurately, it’s usually something along the lines of:

“The housing market has been so crazy, I’m just going to wait it out until prices come back down again.”

With mortgage rates near 8% and average home prices still hitting record highs, many potential homebuyers are feeling pretty discouraged about the current state of the housing market. The shortage of homes for sale has kept the market competitive causing house prices to rise 2.6% since last year.

So this idea of home prices falling at some point in the future is a comforting thought, helping those looking to buy a new house remain optimistic as they watch home prices continue to rise.

The Wall Street Journal recently came out with an article stating that because of the current environment, many people are giving up on buying a house, causing home sales to decline 15.4% since last September. The average monthly mortgage payment is now 52% higher than the average apartment rent. Consequently, people are saving money by renting and using those savings to spend elsewhere which has been the primary driver of the nation’s economic growth.

In the piece, they interview an educator who moved back in with her parents in 2020 with hopes of saving more money to put down on a house.

“What would have been a sizable amount down in 2020 or 2021 now barely put the smallest dent on anything that one might consider decent.”

Another person said:

“We feel like we have all this money and nothing to do with it.”

With many people feeling like the amount they’ve saved for a down payment will never be enough, they’ve pivoted their stance and have begun to spend that money on other things they value.

Consumer spending is up across the board, more and more people are going on vacations, and existing home renovations have seen a big boom.

So going back to the original question, is there a silver lining for all the potential homebuyers out there? Are house prices going to drop?

No one really knows. But we can look at some data and historical precedent to give us an idea of what to expect.

The 2008 housing crash is still in the back of people’s minds and has led many to believe that if house prices go up a lot, then we can expect a repeat of what happened then.

The problem with this line of thinking is the 2008 crash was primarily due to bad lending standards and people taking out mortgages with extremely bad credit scores. This is the type of stuff that was happening in 2008:

This type of loan shenanigans is not happening this time around.

Two-thirds of all mortgage loans since 2017 have gone to borrowers with incredible credit scores (760 and up) while just 2.6% have gone to subprime borrowers. Compare that to 2003 to 2007 where more than 11% of loans went to subprime borrowers and only 26% to those with excellent credit scores.

Now someone might push back and say, “Well, just wait until we hit an economic recession then people will lose their jobs and home prices will have to come down then.”

Not necessarily. Ben Carlson put together an awesome chart looking back at every recession since 1960 juxtaposed with what house prices did during those periods:

As you can see, house prices are very resilient, even during times of economic crisis. The housing market may slow down during a recession, but double-digit drops in price have only happened once over the past 60 years.

So if you’re expecting that, if you wait long enough, house prices are going to drop 20%+ and you’ll be able to afford the house of your dreams, history tells us that probably won’t be the case.

And now you have some slightly depressing data to share with your family members at Thanksgiving dinner this week.

Thanks for reading!