In last week’s blog post, I shared how the real estate market was showing signs of a shift and starting to cool off a little, but does that mean we should expect to see home prices start to fall?

Conditions for home buyers for the majority of this year have been brutal, to say the least. The most common question I’m asked is when I expect conditions to change and prices to start coming back down.

Before we look into the possibility of home prices falling, we need to understand why they are rising in the first place. Continue reading below, or watch the following video, to learn what the experts think home prices will do the rest of this year and in 2022.

Why do home prices keep rising?

Before looking at the possibility of home prices coming down, we need to understand why they have been going up so rapidly in the first place.

Unlike in 2008, home prices have been rising due to the large imbalance between supply and demand. In 2008 we had a speculation-driven market fueled by predatory lending practices. None of that exists today. The vast majority of homes being purchased today are being purchased by the end-user.

The increase in demand can be attributed to 4 main reasons;

Millennials, the largest generation, is reaching prime home-buying age
We have been undersupplied in terms of new construction since the last housing crash
COVID has changed peoples housing needs
Record low-interest rates

When lockdowns from the pandemic first appeared, many thought the housing market was doomed as unemployment soared and uncertainty was everywhere. Instead, the housing market took off as remote work and school became the new normal, and people realized their 2 bedroom apartment, or 3 bedroom, 2 bath house, no longer suited their needs.

Housing migration patterns also changed as people sold in expensive areas and moved to less expensive areas (California to Idaho, or Tennessee for instance) driving prices up in the markets being relocated to.

One concern is that these relocation markets could see bubble conditions emerge as local industry and wages can’t support the higher home prices. while that is definitely a concern, this will be interesting to watch as many of the people relocating brought their higher wages with them since they are still working for the same company in the same position, just remotely.

Other areas, like here in Frisco, TX, or Tennessee, are seeing new companies move in bringing higher-paying jobs with them. How the real estate market responds over the next 12 to 24 months will largely depend on where you live and the dynamics of that market area. For the majority of the country, none of the experts are predicting home prices to come down this year or in 2022.

Home Price Appreciation

One thing everyone does agree on is homes cannot continue to appreciate at the pace they have been. Here are the latest national Y-O-Y appreciation numbers:

The variation in these numbers is due to slightly different calculation methods, but either way these show extremely strong national appreciation.

The National Association of Realtors (NAR) Q2 2021 Home Price Report was recently released which showed these strong conditions are present across the entire country:

While the home price gains, and subsequent wealth accumulation, have been spectacular for homeowners, conditions have been far less spectacular for potential home buyers. In the Frisco and Prosper, TX markets, and Temecula and Murrieta, CA markets where my team operates, the Y-O-Y price appreciation numbers have been even stronger than the national average:

Texas Y-O-Y Home Price Appreciation

Frisco 23.5%
Prosper 27.6%

California Y-O-Y Home Price Appreciation

Temecula 28.5%
Murrieta 29.3%

The lack of supply coupled with high demand has meant bidding wars have become the norm in many markets. Although the number of homes sold over list price fell to below 50% nationally in July, we are still seeing bidding wars dominate in the markets where my team operates.

Average List Price to Sell Price Ratio

Frisco, TX 106.4%
Prosper, TX 105.4%
Temecula, CA 103.3%
Murrieta, CA 104.3%

Is it better just to rent?

Buyers who haven’t been successful in their home search may be wondering if renting for another year or 2 is a better option. While everyone’s situation is different, I invite you to consider the fact that home prices are not the only thing that have been rising, rents have as well. A recent report by Zillow showed that, on average, renters are spending a larger percentage of their monthly income on housing expenses than homeowners are:

By the end of the year, even with rising home prices, renters will spend 7% more of their monthly income on housing expenses than homeowners will.

More than just the monthly cost, other factors should also be considered as indicated by Odeta Kushi, Deputy Chief Economist at First American:

What about the market shifting and cooling?

I did mention that the real estate market was showing signs of shifting and cooling, which is true, but that doesn’t necessarily mean that home prices are going to fall.

What we are seeing is a shift in the amount of inventory and cooling with regard to bidding wars. The number of active listings on the market is beginning to rise and we are also starting to see homes sit on the market just a little longer. Don’t get too excited as inventory, though improving, is still 50% lower than a year ago. Saying that, as the new home builders continue to catch up, and more sellers start listing their homes for sale, we will start to see conditions come more into balance. Just this week I came across several homes that had no offers on them after 10 days on the market. Historically, that would be no big deal, but in the past few months that has been unheard of.

I am also starting to see a few price reductions on properties. Please don’t confuse those price reductions with a depreciating market. As the market starts shifting there will be sellers who priced their homes too high thinking the market would catch them, in many cases it won’t! Those are the homes that you will see price reductions on even though the overall market continues to appreciate.

Home prices in 2022

For those of you hoping that home prices will soften in 2022, it doesn't look like that is going to happen. While you could see a few price declines in a select number of markets, there are no signs that will happen here in North Texas or in Southern California. Everyone agrees that home prices cannot continue appreciating at the pace they have been, but the consensus of the latest surveys show home prices continuing to appreciate next year at a slower pace, but still ahead of the historical average of 3.8%:

Bottom Line

If you’ve been waiting to sell your home to maximize price now would be the time. As more homes come on the market you will find increased competition and those bidding wars that have been pushing prices ever higher will be going away.

For homebuyers, more favorable conditions should start to appear in the months ahead so stay patient!

If you have any questions, or a particular situation you would like to discuss further, please schedule a call with me and I’d be happy to share the insights I have to help you make the best decision for your situation.