15 Reasons Not To Worry if Home Prices Fall

The real estate market boomed in 2020 and 2021, driven by pandemic trends that included financial stimulus, low mortgage rates, demand for extra space, and remote work.

But as they say, easy come, easy go. On the other hand, 2022 has been a different story for housing as demand cools off, mortgage rates rise, and home sales are down double digits.

Most homeowners are wondering whether home prices will indeed fall, as some prognosticators are now forecasting. Moreover, the National Association of Realtors has said we're in a housing recession based on the decline in home sales.

Even if home prices decline, though, homeowners shouldn't panic. Here are 15 reasons why.

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After a sudden run-up in prices, veteran homeowners may fear another housing bubble bursting. However, today's housing market is much different from 2008 on the eve of the financial crisis. That housing bubble was driven by subprime mortgages and easy credit, which led to a wave of defaults.

By contrast, homeowners have much more home equity in today's housing market, and many refinanced at lower rates during the pandemic. There also isn't the same threat of defaults, even if the economy were to sink into a recession.

ALSO READ: Why This Housing Market Is Nowhere Near as Bad as 2008

If you own your own home, you probably own it first for lifestyle reasons, second for financial. Maybe the neighborhood you live in is difficult to rent in, or you like being in control of your own space and having the ability to improve it.

In other words, you're probably in it for the long term. So, even if prices fall over the next few years, it shouldn't affect that long-term perspective, especially as home prices have reliably appreciated throughout American history.

Even after the crash during the financial crisis, prices recovered to new heights over the next decade, showing that even then, investors only needed to lengthen their time horizon to get a return on their investments.

Ultimately, home prices are tied to income, and income is tied to the job market. Though consumer sentiment is down, and inflation is at 40-year highs, the job market remains strong. Unemployment is near all-time lows at just 3.5%. For now, labor shortages seem to be a bigger problem than a lack of jobs in the employment market.

That should help keep home prices elevated or at least ensure minimal price pullback. If the job market starts to sour, that will change things. But it would take serious economic unraveling to get the unemployment rate back up to 10%, where it peaked during the financial crisis.

If you're already a homeowner, inflation may actually be a net positive for you. Though it may be hard to stomach high prices at the pump and in the supermarket, inflation generally lifts asset prices like real estate, providing a good hedge against rising costs.

Higher prices generally lead to higher wages, which leads to higher asset prices because consumers can afford more. Taking that into perspective, inflation is actually a bullish signal for home prices as long as it doesn't lead to a recession.

ALSO READ: Real Estate Inflation

If housing prices do fall, one silver lining is that your property taxes could fall, directly benefitting you by saving you money. On the other hand, a decline in home value is just a paper loss unless you're planning to sell.

Property taxes are generally based on the assessed value of your home, which is usually a percentage of the market value. If the market value falls, the assessed value will fall along with it. And if your city is doing assessments during a price decline, you could see your property taxes decline.

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If you're looking to move up to a bigger or more expensive property, a national home price decline is actually a good thing. If prices decrease, the gap between what your home would sell for and what you'd pay for your next home would be smaller.

If, say, prices fall 10% across the board, you would save 10% on trading up. Similarly, a price decline would be to your advantage if you're looking to purchase a second home or an investment property.

Another reason not to fear declining prices is that there's a national housing shortage dating back to the financial crisis when homebuilders pulled back on building new houses.

Some analysts believe the housing market needs to add four million new homes to meet demand fully. With mortgage rates rising and the market cooling off, homebuilders are already getting cold feet again. As long as that shortage persists, it should help keep prices elevated.

ALSO READ: What's Going On in the Housing Market?

While aggressive rate hikes from the Fed have spooked the housing market, mortgage rates could ease sooner than you think. In the Federal Reserve Open Market Committee's latest set of forecasts in June, the committee members said they expected the federal funds rate to fall in 2024.

If that forecast is correct, mortgage rates would also likely decline. If the economy remains stable at that time, declining mortgage prices should support home price growth, not declines.

Soaring prices for rentals -- another impact of skyrocketing inflation -- offer another reason to be glad you own a home. As a homeowner, your monthly mortgage payment is locked in, at least if you have a fixed-rate mortgage.

Renters don't have that luxury. Many have seen price increases of 10% or even 20% as much of the country faces an affordable housing crisis. Rapidly rising rents will also support demand for home purchases as an alternative, keeping home prices elevated.

Demand for home improvement sent remodeling costs soaring during the pandemic as prices for materials and labor spiked due to shortages in both.

While remodeling costs are still expected to increase in 2022 -- with prices for materials like lumber falling and homebuilders reducing prices for new construction -- the cost of renovations could ease. That will depend on what happens in the housing market and the broader economy.

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Most economists believe that if home prices do fall, the decline will be modest. Given the support for the housing market with the housing shortage, inflationary tailwinds, and well-capitalized mortgage owners, a home price decline is likely to just be in the single digits. Much milder than the one in 2008 when home prices fell by close to a third.

When you think of it that way, a modest price decline isn't nearly as scary as a full-on crash.

ALSO READ: Think Home Prices Are Set to Drop? Don't Be So Sure.

If home prices fall, it will likely be because of declining homebuyer demand rather than an increase in supply. A decline would imply a weak economy or recession, which would encourage the Federal Reserve to cut interest rates.

That, in turn, would lower mortgage rates, giving homebuyers a boost by effectively lowering the costs of homeownership. Housing is cyclical, after all, and the market will recover from a price decrease.

Seeing the value of your home decline has a psychological impact, but it doesn't really matter if you're not planning to sell in the next year or two. It's just a paper loss and doesn't really affect your cash flow or spending power.

If home prices soared in your area and you're afraid of a pullback, it might be a good idea to sell now -- especially if you're already considering moving. However, homeowners might consider taking advantage of any potential opportunities in the housing market, such as materials and renovations, if there is a home price decline.

By distorting the housing market, the pandemic has led Americans to pay more attention to the value of their home than they typically would. After all, the housing market and price speculations have been a popular topic during the last two years, and it's hard to ignore if you're a homeowner.

But if you own your home, chances are, your connection to the home isn't built through money. It's in the people you share it with, the community around you, the peace of mind it gives you, and the work you've put into it. The true value of your home to you is more than just a dollar figure.

ALSO READ: The No. 1 Mistake Homebuyers Make

The housing crash during the financial crisis rocked the economy, and the memory of the housing bust is still fresh in many people's heads. However, sustained home price declines are rare, especially ones as severe as the 2008-era one.

Nationally, prices have only declined a few times in the last century and generally require a unique combination of events. The rapid price increases of the last two years may have led to speculation about a decline. However, there are enough tailwinds in the market to prevent a sharp plunge in prices and possibly even avoid a pullback entirely.

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If you're a homeowner, the value of your home likely represents a good portion, if not a majority, of your net worth. Therefore, it makes sense to worry about your home's value falling.

However, unless you plan to sell your home in the next couple of years, the fall in prices won't affect you. Instead, you're better off focusing on the long term and remembering that your home value will recover if a decline does happen. Over the long run, staying in your home will almost certainly pay off financially.

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