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Published: Sep 09, 2022 4 min read
For Sale Sign In Front Of Home With Downward Facing Arrows In The Sky Behind It
Money; Shutterstock

The housing market is cooling rapidly after two years of double-digit price growth, and consumers finally see light at the end of the tunnel — in the form of falling home prices.

Survey data released earlier this week by Fannie Mae showed that on average, people expect home prices to fall 0.4% over the coming year. It's the first time people have anticipated a decline since August 2020.

While consumer expectations don't always become a reality, most people were anticipating home prices to spike during the pandemic — which is exactly what's happened. The biggest growth expectations over the past three years came in May 2021, when people anticipated prices would increase roughly 4% over the next 12 months.

That turned out to be a drastic underestimate. Between the second quarter of 2021 and the second quarter of this year, the median home price rose from $382,600 to $440,300, according to data from the Census Bureau. That's a 15% jump.

The Fannie Mae survey polls roughly 1,000 people responsible for the financial decisions of their household every month. Last month, people expected home price growth of 1.9% — so something has clearly shifted in their mentality toward the end of the summer.

Sure enough, a slowdown in price growth has already started. Recent data from real estate agent Redfin showed that in August, the average U.S. home sold for less than asking price. That hadn’t happened since March 2021. In July, Zillow’s Home Value Index dropped for the first time in a decade.

Mortgage rates rise, while homebuyers struggle

One of the major drivers of the housing market turnaround is mortgage rates, which are soaring as the Federal Reserve raises its benchmark interest rate to combat inflation. This week, the average rate on a 30-year fixed-rate mortgage climbed to 5.89% — its highest level since 2008.

People are expecting that trend to continue: 61% of those surveyed by Fannie Mae said they think mortgage rates will rise over the next year, while just 11% said they expected them to fall.

Higher rates can help push down home prices, but they won’t necessarily make a tough housing market any easier to navigate. With borrowing costs continuing to rise amid the looming threat of a recession, it’s become increasingly difficult for families to afford to buy homes.

Combine that with the fact that many people expect home prices to fall in the coming months, and you have a recipe for both buyers and sellers dropping out of the market.

“Homebuyers [are] anticipating home price declines,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a statement, “and potential home-sellers not keen to give up their lower, fixed mortgage rate – contributing to a further cooling in home sales through the end of the year.”

With that in mind, it’s no wonder that a whopping 73% of people surveyed said they believe it’s a bad time to buy a home. That’s down 3 percentage points from July, but still 10 percentage points higher than the same time last year.

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