Posted On Oct 18, 2022

Home prices are down month-over-month but still up year-over-year annually. Here's what you should know about home prices and the other ways they can change.

For just about any homeowner, talk of falling home prices can spark panic. With homeownership being the major financial and personal investment it is, there's a natural anxiety that comes with any potential threat to that investment.

However, housing market activity to date does not show a year-over-year decline of home prices – at least not yet. While some data sets show small month-to-month home price declines, month-to-month data is more volatile and does not signal a drastic shift in the market on its own.

There is a marked deceleration in home price growth due to a combination of already high home prices, high mortgage interest rates, low housing inventory and economic uncertainty on a larger scale. Many would-be homebuyers are simply opting out of a purchase now.

As a result, properties on the market sit a bit longer, and sellers are dropping their asking prices more often than during the previous two years, when buyer activity was red-hot and dropping a listing price was almost unheard of.

“The best explanation is that there is a bit of a disconnect between what sellers are expecting and what buyers are willing and able to pay,” says Danielle Hale, chief economist at Realtor.com.

To help you better understand the data, we’re breaking down the different kinds of price drops, declines and decelerations you may hear about, as well as what this means for home prices now and in the future.

What Do Dropping Prices Mean?

When you hear about home prices dropping, it can mean one of a few different things. Clarify which type of dropping price it could be:

Listing price drops. If a house is sitting on the market and not getting much interest, the listing agent and seller will likely have a conversation about dropping the home's asking price. “If we don’t get the traction and we’re doing everything we can … the market will tell us what we need to do,” says Mary Anne McMahon, broker owner of Re/Max Posh Properties in Austin, Texas. When you see more listing price drops on a larger scale, it’s a sign that a tight seller’s market is easing up and potentially starting to favor buyers. Listing price drops often coincide with longer median days on the market.

Deceleration of sale price increases. Home sale prices can still see year-over-year increases, but at a slowing rate. In 2021, home prices increased by 16.9%, according to the National Association of Realtors, the fastest rate on record. While home prices have risen since the start of 2021, the rate of increase is expected to be lower by the end of 2022 – a reasonable expectation because such rapid growth is considered unsustainable.

Month-over-month home price declines. If the median home sale price in June was lower than in May, for example, that's considered a declining month-to-month price. However, because of the largely seasonal nature of the housing market, month-to-month numbers are often considered too volatile to indicate changing trends unless placed into a larger context.

Declining home values. A declining home value occurs when the appraised market value is less than the price a buyer paid for it. A homeowner is only underwater if the market value of the home drops below the amount owed on the property through mortgages or other liens.

Are Home Prices Dropping?

Home sale prices are still rising year-over-year, though at a decelerating rate, and with recent month-over-month declines. The national median home sale price in August, at $389,500, is 7.7% higher than in August 2021, the most recent data available, according to NAR. It is the second consecutive month-over-month decline, however, from the peak median of $413,800 in June, per NAR data.

Realtor.com reports the national median list price for homes active on the market in September was $427,000, a 14% increase compared to September 2021.

The median days on market in September also increased 15% year-over-year to 50 days – a significant change given that many recent homebuyers remember having to scramble to make an offer the day a property was listed on the market.

While national numbers can help you see the overarching trends, individual markets react very differently. The next two sections provide single-market snapshots for Boise, Idaho, and Austin, Texas.

Are Home Prices Dropping in Boise?

Boise has been growing at an exceptional pace for a few years and saw significant interest during the peak of the COVID-19 pandemic. However, fewer buyers on the market are leading to a bigger price reaction.

Redfin reports the median sale price in the Boise market in August was $485,000, a 3% year-over-year decrease.

Listing prices are also dropping more often than they were a year ago, says Yuri Blanco, broker owner of Re/Max Executives in Eagle, Idaho, which is part of the Boise metro area.

“We thought we were placing them at fair market (rates), but they are sitting on the market still,” Blanco says.

That doesn’t mean buyers have stopped looking in the Boise area – those who are shopping are serious, Blanco says, but they are fewer in number. “If the home prices weren’t as high as they are, the interest rates wouldn’t be that big of a deal,” she says.

Sellers aren’t necessarily seeing declining home values, just prices below what they were hoping for. Blanco explains that in real estate, that often has an emotional effect. “They feel like they’ve lost that money when it wasn’t even the right expectation,” Blanco says.

Are Home Prices Dropping in Austin?

Another hot-topic market is Austin, which has become a tech hub in its own right after decades of investment from startups and major corporations seeking a cheaper alternative to the likes of Seattle and San Francisco and San Jose, California. Cut to 2022 and Austin may still be considered cheaper than those West Coast metro areas, but it’s certainly not cheap compared to the rest of the U.S.

Redfin reports the median sale price in the Austin market in August was $578,000, a 5.1% year-over-year increase. Similar to national trends, Austin’s home sale prices show a deceleration in year-over-year increases, and some month-over-month decline from earlier in 2022.

When it comes to activity, McMahon says she sees plenty of buyer interest, even if it’s less than a year ago. “I don’t think we’re in a down market at all, we’re in a healthy market,” McMahon says.

“Now there’s some space for buyers to take a look around. They have room to breathe,” says Kaysha Patel, a real estate agent who works with McMahon at Re/Max Posh Properties in Austin.

McMahon points to continued business investment in the Austin area that attracts more people to the area – and additional real estate investment from those who have faith the city will continue to grow.

“Austin is kind of an anomaly right now. I did feel a little bit of a slowdown, but I feel it turning around and picking back up again,” McMahon says.

Of course, that doesn’t mean sellers will see eternal fast-paced price growth. The deceleration in price growth year-over-year and decline in prices month-over-month indicate there’s a limit to what buyers are willing to pay. Sellers in the Austin market have to take a realistic approach to their home’s value.

“I see most sellers – everybody – probably think their house is worth more than it is,” McMahon says.

What Will Happen to Home Prices Next?

With many contributing factors, there’s no guaranteeing what will happen next in the real estate market. Prices may continue to grow at a slowing rate, they may plateau for a period of time or they could decline.

When prices continue to rise beyond what buyers can afford, dropping prices become more likely across many markets, or even on a national scale. “The longer we see this really substantial price momentum, it increases the odds that we may see prices drop,” Hale says.

That’s not the only potential outcome: “It is also possible that prices just move sideways,” Hale says.

Even if prices drop more, homeowners can worry less about becoming underwater on their homes. Hale stresses that homeowners today have something that people in the Great Recession didn’t: equity.

The average homeowner equity – the portion of a home’s value that the homeowner has beyond any mortgages or other liens – is more than 70%, according to Realtor.com. “It’s not an all-time high, but it’s the highest level we’ve seen in 30 years,” Hale says.

This high amount of equity provides some cushion for homeowners, decreasing the chance of short sales, foreclosure and other distressed sales that were all too common in the Great Recession. That cushion can provide homeowners time in the event that they can't make monthly mortgage payments. Fortunately, that’s not the case for most homeowners right now.

Original Post: Why Are Homeowners Seeing Prices Drop?