House prices are falling, and it’s no longer just a Florida and Texas story. Rising inventory across the country and still reluctant buyers mean that those looking to sell face the prospect of more competition and lower prices next spring if they don’t close on a deal soon. For buyers, holding out can mean a better price. This shift in market psychology should finally break the impasse that has choked transactions for the past few years.
Despite poor affordability, the housing market was protected — or made dysfunctional, depending on your perspective — by a lack of supply as homeowners with pandemic-era mortgage rates felt no pressure to sell. Prices drifted higher. If a house didn’t sell by Labor Day, sellers often withdrew it from the market over the winter on the reasonable view that, come spring, there still wouldn’t be much resale inventory and home prices would likely be a couple of percent higher.
But the enormous cost of homeownership has continued to turn off buyers, leading to a steady grind higher in the number of existing homes for sale. These increased 40% over the past two years and, in April, were at the highest level since 2020. There are now nearly 500,000 more home sellers than buyers, according to Redfin Corp., the biggest differential since the company began tracking the data in 2013. And there’s been no sign of a slowdown either, nor should one be expected while mortgage rates remain near 7%. This time next spring, we should expect inventory levels to be growing at a double-digit pace compared with current levels.
The rise in inventory hasn’t been evenly distributed, making home price trends idiosyncratic. Prices have kept rising in the Northeast and Midwest where supply is low, while elevated inventory levels in Florida and Texas have caused price declines. This latter dynamic is now spreading. The S&P CoreLogic Case-Shiller US National Home Price Index fell in March from the previous month, on a seasonally adjusted basis, for the first time in over two years. Only a handful of the 20 metros the indices track — New York City and a few Midwest metros — showed material home price growth. Rick Palacios Jr. of John Burns Research & Consulting said last week that home prices in their data are now falling year over year in Phoenix, Denver, Atlanta and Raleigh, with more metros approaching negative territory.
The expectation from buyers and sellers that home price declines will continue has the potential to thaw a market that’s been largely frozen in place for the past two-and-a-half years. Even if a homeowner has a low mortgage rate or a fully paid-off home, holding onto a house costs money — all homeowners deal with some mix of property taxes, insurance and run-of-the-mill maintenance expenses. Paying those when you think home prices will continue to rise or be no worse than unchanged is one thing, but if the reasonable expectation is lower prices and more competition from other listings, it makes more sense to negotiate and sell.
That’s the dynamic to watch in markets throughout the South and West over the next several months. We are already past the peak of the spring home-selling season in regional metros where the school year starts in early August. Inventory and price cuts should continue to rise from here, based on normal seasonality, as bids dry up with the new school year approaching. The price drop for March in the Case-Shiller index will likely persist — historically, home price declines last for several months once they begin.
The question is how buyers respond. I’ve written about how falling rents and a relative glut of new apartments in a number of key housing markets favor renting over buying. From a purely economic perspective, buyers are better off waiting until next spring when resale housing inventory is likely to be higher than it is today with more downward pressure on prices. But housing choices aren’t solely about economics — many people are in a phase of life where they desire homeownership for family or lifestyle reasons. And while affordability is still poor, it’s slowly improving in markets where prices are stagnant or falling and where incomes continue to grow. Sellers are showing that they’re finally more motivated to transact; buyers just have to decide on what terms they’re willing to meet them.
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