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

Amid the current media frenzy about home sellers adjusting their prices downward, it is imperative to understand that these headlines are more inclined to alarm than to elucidate. Here’s an accurate portrayal of the real estate landscape.

Understanding the Real Situation

Contrary to the alarming headlines, home prices are still higher than they were a year ago and are expected to continue ascending, albeit at a tempered rate. An article from Redfin highlighted, “Price Drops Hit Highest Level in 18 Months As High Rates Dampen Buyer Demand,” which could be misconstrued as an indication of falling prices.

Indeed, the latest report from Realtor.com shows that 16.6% of homes listed had price reductions in May, up from 12.7% last May. However, this does not equate to an overall decline in home values.

Deciphering Asking Price vs. Sold Price

The asking price, or listing price, is essentially the amount a seller hopes to obtain for their property. In the current market, sellers cannot arbitrarily set a price and expect buyers to pay a premium, especially when higher mortgage rates are stretching buyers’ budgets. Consequently, sellers are adjusting their prices to attract potential buyers.

Market dynamics and buyer offers can prompt changes in the asking price. Sellers may lower the price to spark interest if they initially overpriced their homes. This is where price reductions come into play. Headlines about “price drops” may misleadingly suggest a decline in home values.

As Mike Simonsen, CEO and Founder of Altos Research, notes, “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.” However, the final sold price—the amount the buyer pays upon completing the transaction—remains crucial.

The critical takeaway is that actual sold prices are still on an upward trajectory and are projected to continue rising for at least the next five years.

Implications for Home Prices

While an increase in price reductions has been observed, this does not signify a depreciation in overall home values. Instead, it reflects a moderating demand, prompting sellers to align their expectations with the current market conditions. Despite more frequent price reductions, home values continue to grow annually, as they historically do in the real estate market.

According to the Federal Housing Finance Agency (FHFA), home prices increased by 6.6% over the past year, as illustrated in the accompanying map, showing a widespread rise in prices across the country, indicating that the market is not in decline.

Thus, while price reductions may foreshadow moderated price growth in the coming months, they should not be cause for alarm. The same Redfin article also mentions, “. . .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 the current tight inventory, price moderation is more probable in the near future than price declines.

Benefits for Buyers and Sellers

For buyers, more realistic asking prices offer a better chance to secure a home at a fair price and enter the market with greater confidence, knowing prices are stabilizing rather than skyrocketing.

For sellers, understanding the necessity of adjusting asking prices can expedite sales and reduce the need for extensive price negotiations. Setting a realistic price from the outset can attract more serious buyers and lead to smoother transactions.

Conclusion

The rise in price reductions should not be viewed with trepidation but as a market responding to new conditions. Home prices are still increasing, though at a more moderate pace. The adjustments reflect a healthy market equilibrium, beneficial for both buyers and sellers.