Home Prices Could Drop This Year -- but Only if These Things Happen

It'll take a perfect storm of events to bring home prices down significantly.

Buying a home has been a frustrating experience for many people since the latter part of 2020. That's because back then, mortgage rates dropped to record lows, and that led to a surge in buyer demand.

Meanwhile, since mid-2020, the supply of available homes has not been robust enough to meet demand. That's led to a string of bidding wars and sky-high home prices.

In March, home prices rose 20.6% on a national level, as per the S&P CoreLogic Case-Shiller Home Price Index. That marked the highest increase in more than 35 years of data.

At this point, there's no indication that home prices are going to drop anytime soon. But that could change if the right circumstances align. In fact, if these things happen, we could see a notable drop in home prices by the time 2022 comes to a close.

1. Inventory picks up

Any time you have a situation where demand for a given item exceeds the available supply, that item's price is likely to rise. It explains why it's gotten so expensive to buy a car (what with major shortages happening all over the country), and it also explains why home prices are way up.

In April, there was a mere 2.2-month supply of available homes on the market, according to the National Association of Realtors. But that's well below the 4- to 6-month supply it takes to create a more equal housing market -- one where neither buyers nor sellers have a clear advantage.

If housing inventory picks up this year in a meaningful way, it could narrow the gap between demand and supply, leading to a drop in prices. But for that to happen, more people will need to start listing their homes and new construction will have to increase.

2. Mortgage rates rise a lot more

Although mortgage rates are much higher now than they were at the start of the year, they're not out of hand. But borrowing for a home could get more expensive as the Federal Reserve moves forward with planned interest rate hikes.

If mortgage rates climb a lot, it could drive buyers out of the market due to affordability issues. That could, in turn, lead to diminished demand -- and lower prices.

3. A recession hits

The federal reserve is raising interest rates in an effort to slow the rate of inflation. In doing so, consumer borrowing is apt to get increasingly more expensive. That could lead to consumers spending less across the board. And if a lot less money is pumped into the economy, it could pave the way to a downturn and higher levels of unemployment.

If that happens, buyers might hesitate to pursue home purchases until the economic situation improves. And some may have to put plans to buy on hold if they lose their jobs.

Obviously, we don't want to hope for a recession to hit and set the economy back. But if that happens, demand for homes should wane, leading to lower prices.

Buyers shouldn't hold their breath

Many buyers are desperate to see home prices move in a downward direction. But it's too soon to say whether that will happen this year, and there's a good chance it won't.

Those who have been struggling to buy given today's prices may need to put their homeownership plans on hold -- even if that isn't ideal. On the other hand, we can't discount the possibility of all of the above factors coming together to give buyers some much-needed relief.