Home Prices Are Dropping: Is This A Good Time To Buy A House?

Investing in real estate is often seen as a surefire way of hedging against inflation and acquiring an asset that will most likely appreciate in value over the long run.

That’s certainly been true for the past 10 years. From the first quarter of 2013 to the second quarter of 2022, house prices appreciated 94.5%, which accounts for a 60.8% rise when adjusting for inflation.

But those days might be over as recent rumors of a housing bubble crash have had homebuyers holding off when considering purchasing a new home in 2022.

Home Prices Are Dropping: If you’re thinking this might not be the best time to buy a new home, you’re not alone. 

Mortgage purchase applications are down 41% year-over-year, pushed by this year’s multiple hikes on interest rates by the Fed.

The average fixed rate on 30-year mortgages now sits at 7%, the highest it’s been in 20 years, according to Bankrate. By the end of last year, the same rate sat at 3%.

Yet, according to a new study by the Federal Reserve Bank of Dallas, the pushback on demand for new houses led by higher mortgage rates could lead to a market correction, bringing down home prices by up to 20%.

According to Enrique Martínez-García, senior research economist and advisor at the Dallas Fed, home prices are most likely to drop in the near future, but whether that’s a hard crash or a soft landing is still to be seen.

“In the current environment, when housing demand is showing signs of softening, monetary policy needs to carefully thread the needle of bringing inflation down without setting off a downward house-price spiral — a significant housing sell-off,” wrote Martínez-García on Tuesday.

In his view, the COVID-19 pandemic housing boom was partly driven by pandemic-era FOMO ("fear of missing out") beliefs, and that can be seen in the fact that almost a quarter of homes acquired during 2021 were bought by large institutional investors instead of regular people looking for a place to live, according to a report by Pew.

Diane Swonk, chief economist at KPMG, also believes the housing market is likely to experience a correction sooner rather than later.

The economist recently told Fortune that we’re easily going to see large double-digits declines. 

“I think 15% next year is very conservative. We’re already turning,” said Swonk, in reference to a visible drop in home prices of 1.3% between June and August. A first since 2012.

Fixing Up Instead Of Moving Out? On its latest earnings call, Home Depot HD — the country’s largest retailer for home improvement goods — paid special attention to the housing market as a gauge to measure the future path of its own business.

“With mortgage rates increasing, our customer is becoming more and more likely to stay in place and begin a project,” Richard McPhail, executive vice president and chief financial officer at Home Depot.

According to a new report by the National Association of Home Builders, sentiment is low for those developing today’s supply of new homes.

“Builder confidence in the market for newly built single-family homes posted its 11th straight monthly decline in November,” said the report.

The association further confirms that home prices are dropping: “37% of builders cut prices in November, up from 26% in September, with an average price of reduction of 6%.”

Benzinga’s Take: Buying a home will continue to be a safe route for value preservation. However, all signs point to today being an inflection point in the housing market’s boom of recent times.

Housing prices are expected to drop during the coming months. However, mortgage rates are likely to remain at record levels, as most Fed officials are anticipating the funds rate to continue to rise well into 2023, and remain above 4% until inflation begins to wind down.

With that in mind, the coming months might present good buying opportunities for buyers able to buy a house debt-free. Those looking to get into a mortgage should analyze if the upcoming drop in prices makes up for high-interest rates, especially when considering a fixed rate scheme.

Photo by Johnson Johnson on Unsplash.