BANK RATE: WILL HOME PRICES GO DOWN?

In 2022, hopeful homebuyers were up against sky-high interest rates and rock-bottom inventory deficits. These factors put homeownership out of reach for many people, particularly first-time buyers, who saw monthly mortgage payments on a typical starter home balloon by 49 percent in just one year, according to the National Association of Realtors (NAR). Single-family home prices rose 8.6 percent from the third quarter of 2021 to the third quarter of 2022. Will home prices ever come back down to earth?

NAR does expect more stability in home prices for 2023, and many other housing market experts predict the same. If you’re hoping to buy a house this year, the prices you see will depend largely on your local market — and the Federal Reserve’s rate moves. Here’s a deeper look.

What’s driving housing prices?

Many factors affect home prices, but some weigh more heavily than others. These are some of the major variables most likely to drive housing prices:

• Mortgage rates: The interest rate on a home loan can drastically sway the long-term price of ownership. As of early February, the average interest rate on a 30-year fixed rate loan was around 6.5 percent, much higher than rates have been over the last couple years. The higher monthly payments that result mean less purchasing power for buyers, which in turn means fewer people that can afford high home prices.

• Available inventory: When there is high buyer demand but few options on the market to meet it, sellers can get away with asking higher prices. However, the pandemic’s raging seller’s market is starting to tilt back into balance in many areas. NAR data shows there were 90,000 more homes for sale in 2022 than in 2021. This is a small increase in the grand scheme of things, but an increase nevertheless — if the trend continues through 2023, prices may decrease as options increase.

• Inflation: Inflation is finally starting to ease, which is obviously good news for consumers. However, the declining inflation rate is not driving down housing prices as much as it is gas prices and other costs. Homebuyers are still feeling the financial crunch.

• Local market conditions: In the end, real estate is a very local industry, and prices can soar sky-high in one location while at the same time plummeting in another. The local job market, housing stock and overall cost of living all play large roles in each market’s housing prices.

Are home prices dropping?

Historically, home prices tend to rise over time, not fall. Prices are currently coming down in some markets, but experts do not expect dramatic drops, at least not for early 2023.

In many areas where prices are falling, the declines have not significantly improved affordability. Take the notoriously expensive San Francisco Bay Area, for example. According to data from the California Association of Realtors, Bay Area prices fell nearly 10 percent over the course of 2020. However, despite that seemingly considerable drop, the median price for a single-family home was still over $1 million — lower than before, yes, but still well out of reach for the average buyer.

Where are they dropping the most?

According to a recent Redfin report, 2022 home prices were down the most in the following metro areas:

Notably, the state most represented on this list is California. Anaheim, San Diego and Riverside also saw price drops during 2022, Redfin says, though not enough to make the top 10.

Should I buy a house now or wait?

Is today the day to put in an offer? Or should you put your home search on hold for now? While there isn’t a one-size-fits-all answer, there are a few things to consider when deciding whether you should buy a home now or pump the brakes.

1. Do you plan to stay put for a while?

Given the closing costs associated with buying a home, which can run up to 5 percent of the purchase price, it doesn’t usually make sense to buy a home if you won’t live there long enough to recoup those costs. There are also tax implications to consider if you sell a home after only a short time.

2. What do mortgage rates and other economic trends look like?

Keep an eye on the fluctuation of mortgage rates. If you can lock in a relatively low rate — or one that fits within your budget, at least — it may be a good time to buy. You can always refinance later if rates go down. Consider the overall economy, too: Fears of a possible recession still loom large in 2023, and if your job situation is not completely stable, it might be smart to hold off.

3. How much inventory is available near you?

The fewer homes that are available on the market, the hotter the competition will be for them. When buyers don’t have a lot to choose from, sellers have the upper hand — and prices tend to rise. Inventory is still low across most of the country, which contributes to prices remaining high. If you live in a market where competition is still fierce, you may want to wait for things to balance out a bit more.

What other factors should I consider?

Do an honest analysis of your personal finances before you decide whether the time is right to buy a home. How much do you have in savings? How much other debt do you have, like student loans or car payments? What’s your credit score? Buyers with less-than-stellar credit won’t be able to take advantage of the best available rates. It may be smart to take some time to improve your credit score and pay down your existing debt. Consider putting the money you plan to put toward a down payment fund in a high-yield savings account while you wait. When you’re ready, Bankrate’s new-home calculator can help you crunch the numbers to figure out how much you can comfortably afford.

Bottom line

While mortgage rates are down from their 7-percent-plus peak in 2022, home prices remain high. Housing market experts do expect prices to decline a bit in 2023, but not dramatically. If you’re hoping to buy a house this year, consult with an experienced local real estate agent to learn more about the market in your area.