Softening home prices, falling home prices… what’s happening in the real estate market?

Last month (August 2018) saw the biggest increase in new listings in more than 3 years. That, coupled with  another increase in interest rates begs the question of what that will mean for the real estate housing market, and more specifically for home prices. One month does not a trend make, but it is the fourth time in a rolling 12 months that new listings have increased. I see this more as a sign that the market is struggling to get back to ‘normal’, whatever that is.

We have been riding a real estate roller coaster for the last 10 years, with price swings anything but normal. The chart below shows the percentage change in home prices comparing YTD home prices in August year-over-year. I have heard many people express concern that home prices are softening. We don’t see evidence of softening yet (lower percentage change than the previous year) based on August stats. Instead, because of extreme shortage of homes for sale and resulting bidding wars for homes resulting in average sale prices at 99%-101% of list price, we have seen home prices strengthening. Perhaps the added inventory will reflect a softening of prices again when we get stats for September. It feels like it living in the real estate world, but it is hard to tell whether it is the normal seasonal change or a year-over-year market shift.

Prices depreciated 2008-2011, then appreciated in the double digits in 2012-2013 as the real estate market struggled to find a new balance and make up lost values. After the 15.8% appreciation in sales prices in 2013, home price appreciation softened in 2014-2016… meaning home price appreciation was less than the year before.

Inventory levels have consistently dropped since 2014 as prices have strengthened due to the laws of supply and demand. This year has shown stronger price growth as supply has fallen even lower and buyers are eager to secure a home in light of rising rents and interest rates.

The market always slows down in the fall and winter months and picks again in the spring and summer, regardless of other market conditions… it’s the normal market cycle and the reason for the humps in the chart above.

With heightened awareness of the real estate market, many people are worried that prices will fall again like they did 10 years ago. Conditions now are different from what they were in 2008, when Twin Cities home prices depreciated by 13%. At that time there was a surplus of homes for sale, with foreclosures making up close to half of the homes sold. You can see in the chart below that the percentage of foreclosure sales now is minuscule… perhaps part of the reason for the inventory shortage.

Don’t confuse “softening home prices” with “falling home prices”. Softening prices means appreciation is less than last year but values are still going up. Falling prices signifies price depreciation such as what happened in 2008-2011 when values fell.

Historically, home prices are expected to appreciate 3.7% per year in a “normal” market… a rate not seen in the last 10 years. A softening of price appreciation would be a healthy sign we are moving to a more normal market balanced between buyer and seller… a market not seen in the last 10 years!

Sharlene Hensrud, RE/MAX Results – shensrud@homesmsp.com

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I love what I do! Highly insightful, analytical and creative, there is nothing I love more than helping you find the right solution for your real estate transition. My mission is to serve my clients with honesty and integrity, exceeding their expectations in service and support… and to help others by donating a portion of every transaction to Habitat for Humanity.

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