Review of all things Real Estate: Home prices might drop but won't crash: what buyers should know

Bob Hillery

CR Properties

Wannabe home buyers are hoping for a full on housing market crash because prices have zoomed up so fast. Regardless of what buyers wish for though, we're unlikely to have a repeat of the crash we experienced from 2008 to 2014 when house prices fell by double digit percentages from their 2007 peak.

Prices "might go down a little bit, but a crash I consider to be more than 10% decline in home values, and that seems far-fetched right now," said Daryl Fairweather, Redfin chief economist. Some forecasters expect home prices to drop nationally by a few percentage points over the next year or two and to fall significantly in a few metro areas. Whether you long to buy your first home or you own one and have considered selling, here's what falling prices could mean.

If prices fall, buyers may stall

You want to buy a home and prices are dropping in your city, but you’re tempted to wait. Why buy a house today if you believe you'll be able to pay less for a similar house in a few months?

The problem with this logic is that no one can legitimately predict when prices will hit bottom. Wait too long, and you'll end up trying to buy when prices are rising and competition increases. This strategy, called market timing, is inadvisable, said Odeta Kushi, deputy chief economist for First American Financial Corp.

"If you can find a house that meets your monthly payment financial expectations and it is a good time for you to buy, then do that," she said.

If you wait for prices to fall, but they never do, you may discover the hard way that the "house you found a year ago which you really loved, that you could afford but you passed up, is more expensive next year," Kushi said.

Seller’s qualms set a floor under prices

The wait for home prices to plunge could be thwarted by homeowner’s unwillingness to give up their gains; during the pandemic era housing boom, homeowners got several things they'll want to keep.

The first is inflated home values. Kushi called home prices "downward sticky," meaning that sellers are reluctant to accept reductions unless they're desperate to sell.

The other thing that homeowners like, low mortgage rates. Through refinancing or well-timed purchases, 92% of homeowners with mortgages have rates below 5%, and half have rates below 3.5%, per housing analyst Ivy Zelman.

"If you're a homeowner today who's locked into a 2.7% mortgage rate, what's your incentive to sell your home and purchase a home at a higher mortgage rate today?” First American's chief economist Mark Fleming said, "Not much, you’re rate locked in." (https://www.nerdwallet.com/article/mortgages/the-property-line-may-2022)

There already are signs of a "sellers' strike," as economics blogger Bill McBride calls this phenomenon. In a survey of 25 housing markets, McBride noted a 10.6% decline in new listings in August compared to a year before. When owners keep their homes off the market, they reduce the number that are available to buy. A limited supply could restrain a drop in prices as buyers compete for limited listings.

When you owe more than the home is worth

Nearly 10 million existing homes have been sold since the beginning of 2021 in an era of swift price appreciation. A drop in home values would mean that recent buyers could end up owing more than their houses are worth. Called being upside-down, if you end up in this situation, you have several options.

• Keep the house, make the mortgage payments, and wait for home prices to recover. This will be the most utilized option, even for families that outgrow their homes.

• If you sell the house while upside down, you'll have into tap savings to pay off the full loan balance plus real estate commissions and other transaction expenses.

• If you don't have enough cash to repay the mortgage balance, you can seek the lender's permission to sell the house in a short sale. (https://www.nerdwallet.com/article/mortgages/what-is-a-short-sale) The lender might deny permission though if you can afford the monthly house payments, that would lock you into Option 1.

Less equity to borrow against

Then there's the matter of home equity lines of credit, or HELOCs. These are second mortgages that allow you to borrow against your home's equity. To qualify, you'll need to have enough equity: generally, at least 20%. It's possible that falling home values could erase enough equity to drop you below the 20% threshold, making you ineligible for a HELOC. (https://www.nerdwallet.com/article/mortgages/heloc-home-equity-line-of-credit)

During the hottest period of the pandemic era housing boom, when prices were rising more than 15% per year, few buyers worried about home values eventually falling. That irrational exuberance is now being replaced by caution; fear of buying at the top.