Home Prices Aren’t Declining, But Headlines Might Make You Think They Are

If you’ve been keeping up with the news about home sellers cutting prices, you might think the housing market is in decline. However, this is a perfect example of how headlines can be more alarming than informative. Here's the real story about home prices.

The Reality of Home Prices

Home prices are higher than they were a year ago, and they are projected to keep rising, though at a slower rate.

A recent Redfin article stated,

“Price Drops Hit Highest Level in 18 Months As High Rates Dampen Buyer Demand.”

This might lead you to believe that home prices are falling.

While the latest data from Realtor.com shows that 16.6% of homes on the market had price reductions in May, up from 12.7% last May, this does not indicate that overall home prices are declining.

Understanding Asking Price vs. Sold Price

The asking price, or listing price, is what the seller hopes to get for their home. However, sellers can't simply name any price and expect buyers to pay it. Today's buyers are knowledgeable and mindful of their budgets, especially with higher mortgage rates. This forces sellers to adjust their asking prices.

When a home doesn’t attract much interest, sellers might lower the asking price to draw in potential buyers. These adjustments are what headlines refer to as “price drops,” which can sound like home prices are declining.

Mike Simonsen, CEO and Founder of Altos Research, says:

“Not only is the share of homes with price cuts elevated compared to one year ago, but more price cuts are happening each week than last year.”

Conversely, the sold price is the actual amount a buyer pays for a home once the deal is finalized.

The key takeaway is that sold prices are still on the rise and are expected to continue increasing for at least the next five years.

What Does This Mean for Home Prices?

The recent increase in price reductions does not equate to a decrease in overall home values. It indicates that demand is cooling off, leading sellers to adjust their expectations to the current market conditions.

Despite more price reductions, home values are still increasing on an annual basis, which is a typical trend in the housing market. According to the Federal Housing Finance Agency (FHFA), home prices rose by 6.6% over the past year.(see below):

This map shows that prices increased almost everywhere across the country, confirming that the market is not in decline.

While price reductions can signal that prices may moderate in the future, this is not a reason for concern. The same Redfin article also notes:

“. . . those metrics suggest sale-price growth could soften in the coming months as persistently high mortgage rates turn off homebuyers. For now, the median-home sale price is up 4.3% year over year to another record high. . .”

With current inventory levels as low as they are, we are more likely to see price moderation rather than significant declines in the coming months.

Why This Is Good News for Buyers and Sellers

For buyers, more realistic asking prices mean a better chance of purchasing a home at a fair price. It also allows buyers to enter the market with more confidence, knowing that prices are stabilizing.

For sellers, understanding the need to adjust your asking price can lead to quicker sales and fewer price negotiations. Setting a realistic price from the beginning can attract serious buyers and result in smoother transactions.

Bottom Line

The increase in price reductions might seem concerning, but it’s actually a sign of a market adapting to new conditions. Home prices are still growing, just at a more moderate rate.

6-12-2024