Homebuyers have had a tough several years since the pandemic began. A confluence of factors, including low interest rates and a national inventory decline, led to prices skyrocketing across the U.S. The circumstances encouraged sellers to offload a home, and people did so in record numbers. But buyers were facing a situation where they had none of the leverage, and bidding wars over the asking price became common practice. However, it now appears that the housing market might be course-correcting. Home values are starting to come back to Earth, with the end of summer spelling a huge drop in home prices.
According to the New York Post, median home prices fell by 0.98% from July to August, just a month after declining 1.05% from June to July. While these numbers might not sound substantial, they represent historic price declines. They are the sharpest home value drops since the winter of the 2008 financial crisis.
There are many reasons why home prices have declined. One of the significant ones is that economic indicators have the economy moving into a recession. The general definition of a recession is two straight quarters of negative GDP growth, and under that definition, the U.S. entered a recession this summer. On top of that, the highs of the stock markets that inflated the wallets of many Americans came crashing down. Tech stocks and cryptocurrencies were hit hardest, and many saw significant portions of their wealth disappear.
However, the most significant factor might be the increase in mortgage rates. The Federal Reserve has been steadily increasing interest rates to combat inflation that had been rampant after the pandemic’s major economic impact. The same New York Post report showed that these rates are now at 6.7% as of the end of September, which is more than double the amount it was in January. This makes purchasing a home more difficult.
The low interest rates of the previous two years made mortgage rates reach historic lows. This spurred massive buyer interest, especially when many were considering relocating due to remote work enabling more freedom. This all contributed to a surge of buyer demand bigger than ever seen before, and prices rose accordingly. What is happening now could just be a natural course correction, or it could spell trouble for sellers.
This isn’t necessarily great news for buyers. Home prices are declining, but interest rates are increasing, so homes may remain just as difficult to secure. Even with the current decline, prices are still markedly higher than when the pandemic began. According to statistics from the Federal Reserve Economic Data, the median sales price in the United States in quarter 2 of 2020 was $322,600. It is currently $440,300.
With mortgage rates and prices extremely high, buyer demand is naturally falling. This is a big reason for the price drop, as homeowners try to price their property more competitively to incentivize buyer interest.
After two straight years of stratospheric growth in home values across America, it is only natural that a downturn would arrive. This summer, a steep decline in home values showed that this downturn is here. At a time of significant economic uncertainty, with mortgage rates increasing dramatically, it is only natural for buyers to be more hesitant and prices to drop accordingly. While no one knows what the future holds, unlimited growth was never possible. A steep price drop like this was an inevitable conclusion to the market’s wild few years.
