Do falling home prices make it a risky time to buy?

December 20, 2022 - 4 min read

Should home buyers beware of the cooling market?

Home prices saw unprecedented growth over the last few years. Recent value gains even surpassed those from the housing bubble in 2008, according to the Case-Shiller Index. Needless to say, the market’s been white-hot.

Fortunately, prices are beginning to cool off. But that raises other questions for prospective buyers: Are we heading toward a crash? What if I buy now and prices keep falling? Is waiting to buy even riskier? Luckily, we have answers.

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Where home prices are coming down

The U.S. housing market is cooling overall compared to 2021 and early 2022, with many cities experiencing price declines.

Some of the cooling is due to reduced home buyer demand. Some of it is a natural price correction after the abnormally rapid growth during the pandemic.

“I think we will continue to see price declines at least through the middle of 2023.”

–Selma Hepp, deputy chief economist at Corelogic

“Most markets are overpriced at this point by definition. Two thirds of core-based statistical areas (CBSAs) have recorded declines from the peak earlier this year. I think we will continue to see price declines at least through the middle of 2023,” said Selma Hepp, deputy chief economist at Corelogic.

The U.S. median home sales price fell 2.7% from the second quarter this year to the third, according to Attom Data Solutions. By population, 48 of the top 100 metro areas saw drops — with 24 of those larger than the overall decline. The biggest quarterly decreases can be found below:

Metro AreaQ2 to Q3 Change in Med. Price Metro AreaQ2 to Q3 Change in Med. Price 
San Francisco-Oakland-Hayward, CA-13.0%Sacramento-Roseville-Arden-Arcade, CA-4.8%
Charleston-North Charleston, SC-12.8%Spokane-Spokane Valley, WA-4.8%
San Jose-Sunnyvale-Santa Clara, CA-8.3%Washington-Arlington-Alexandria, DC-VA-MD-WV-4.6%
New Orleans-Metairie, LA-7.5%Boise City, ID-4.5%
Seattle-Tacoma-Bellevue, WA-7.2%Salt Lake City, UT-4.3%
Stockton-Lodi, CA-5.5%Baton Rouge, LA-4.3%
San Diego-Carlsbad, CA-5.3%Los Angeles-Long Beach-Anaheim, CA-4.2%
Austin-Round Rock, TX-4.8%Birmingham-Hoover, AL-4.1%

“We think prices will probably decline at 5% nationally by around the end of 2023, but local results are going to be all over the place,” said Rick Sharga, EVP of market intelligence at Attom Data Solutions.

“In broad strokes, areas where we had astronomical price increases over the last couple of years are likely to have clawback and I wouldn’t be surprised to see double-digit declines in some of those until the market settles,” he added.

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What happens if I buy and prices keep dropping?

Being “underwater” as a borrower means you owe more on your mortgage than the property is worth. While being underwater could be the first step on the road to foreclosure, it’s usually an innocuous, temporary status.

Although home prices may not rise every year, they do almost always go up over time. As long as you plan to keep your home long-term and continue paying your mortgage, a temporary price drop shouldn’t impact you. Eventual price gains will correct the temporary loss and put you back in a position of equity.

The exception would be if you plan on selling your home relatively quickly, in which case a short-term price drop could net you a financial loss.

“The typical homeowner lives in their house for around 15 years. In that time, you’re going to be building equity and paying down your mortgage. The slight dip in prices right now isn’t something that should be concerning to most people. Being underwater on the mortgage only actually makes an impact and matters when you’re trying to sell,” said Nicole Bachaud, senior economist at Zillow.

Is it a good time to buy a house?

For the market at large, affordability has improved compared to a few months ago as interest rates and property values started to descend. Both of those factors may continue to a certain degree in 2023 as well.

Of course, individual markets and personal finances play a huge role in the decision to buy. You should take the necessary steps to homeownership and make sure you’re comfortable with today’s interest rates and your monthly payments.

Put simply, buying is a good idea as long as you can afford it. “I’m not talking about something you’re going to sell in a year. But for most people in most markets, it’s not a bad time to buy,” Sharga said.

“In fact,” he continued, “this time of year is generally a really good time to buy because there’s less competition and sellers tend to be more open to negotiations. You might actually be able to get a relative bargain. All that said, know your market.”

Advice for home buyers

Interest rates doubled over the course of 2022, with the average 30-year fixed-rate mortgage peaking at 7.08% on Nov. 10, according to Freddie Mac. However, that average decreased for five consecutive weeks and sat at 6.31% as of Dec. 15.

As historically high inflation lessens, so will the severity of the Federal Reserve’s policy to bring it down. This makes it “very likely interest rates will come down over the next 18 to 24 months,” Sharga said.

He reminds buyers that “You could buy a house you can afford today and refinance into a lower rate to lower your monthly payments in a few years — which certainly isn’t going to be the case if you’re renting.”

If you’re ready to buy, reach out to a local mortgage lender to check what loan types and interest rates you qualify for.

Time to make a move? Let us find the right mortgage for you

Paul Centopani
Authored By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.