Here's Why Home Prices Will Fall This Year

Home prices may fall as much as 20%.

The housing market is always in flux and this year is no different. Experts predict that home prices will take a dip this year due to a variety of economic factors. But will we see another 2009 housing crisis? Here's why home prices are expected to fall in 2023.

Mortgage rates

In an attempt to slow down high inflation, the Fed raised rates seven times in 2022 with more rate hikes in 2023. This affects the cost of all kinds of loans, from auto loans to mortgages. As a result, mortgage rates have almost doubled from a year ago. To put this in perspective, for a $500,000 home your monthly payment would be $1,000 higher if you get a mortgage today compared to a year ago.

This means mortgages are becoming more expensive for potential home buyers, leading them to delay purchasing a home until they know they can afford it. Rising mortgage rates have also made it more difficult for sellers to find buyers who can qualify for loans at these higher interest rates.

Supply and demand

The average price of homes hit all-time highs last year due to the pandemic restrictions, low mortgage rates, and low inventory. Since hitting its peak, existing home sales have fallen for 11 consecutive months. The last time the pace of sales was this low was in 2010, during the housing crisis. Demand has fallen due to the high prices of homes and mortgage rates, making them unaffordable for many home buyers.

With the supply of single-family homes growing and demand decreasing, some experts believe that home prices may drop by 20% from their June peak of $414,000. As a result, a decrease in demand combined with an increase in supply of homes on the market has caused home values to decline across the country.

Fears of recession

While we are technically not in a recession, there are signs we will soon be heading into one. Last year, over 107,000 tech workers were laid off, with another 46,000 workers losing their jobs in the past several weeks. Dozens of crypto platforms and funds have declared bankruptcy and Wall Street has taken a beating the past 12 months, at one point entering bear market territory. The S&P 500 was down close to 20% in 2022 while the Nasdaq fell 34%. Corporate earnings show signs of economic slowdown, potentially leading to more layoffs in the coming months.

Will the market collapse?

Home prices are expected to decline but not to the extent we saw during the Great Recession. Banks and lenders have been more strict about qualifications for loans, and unlike 2008, there is much less inventory in homes. Unemployment overall is still low, so a surge of defaults is less likely too.

Plus, many homeowners locked in low interest rates, making their payments more affordable. So even though demand has slowed, low supply of homes and less likelihood of homeowners defaulting will help prevent the market from collapsing.

No matter what happens in the next few years, it's important to remember that the real estate market fluctuates over time and can recover from even the most drastic dips in prices. The combination of fewer buyers and more homes available has caused prices to drop since hitting its high last year -- and they are expected to continue dropping throughout 2023 as well. A price decline, however, will be good for first-time home buyers. With some research and smart planning, home buyers may be able to navigate this shifting landscape successfully!