Why Aren't Home Prices Dropping?

First and foremost, it's important to understand that supply and demand drive the real estate market. In San Diego, demand for homes has remained high, despite the pandemic. There are a number of factors that contribute to this, including the area's beautiful climate, proximity to the coast, and robust job market. The influx of out-of-state buyers, particularly from cities like Los Angeles and San Francisco, has also contributed to increased demand.

For one, the nation’s housing supply remains limited. Those who purchased homes in recent years at record-low interest rates are staying put. Tight inventory issues, in part, are also keeping prices from dropping off, which is perpetuating affordability challenges for many, especially first-time homebuyers.

Though home prices remain high year-over-year, they’re not as eye-popping as they were in early 2022. Even so, how much further home prices dip in 2023 will likely depend on where mortgage rates go.

Housing Market Forecast for April 2023

As we move into spring homebuying season, housing experts maintain a watchful eye on the economy, which continues to be pulled in all directions by high inflation, steep interest rates, ongoing geopolitical uncertainties and recession fears, to name a few.

Low housing inventory has been a challenge since the 2008 housing crash when the construction of new homes plummeted. It hasn’t fully recovered—and won’t in 2023.

Housing supply remaining stuck at near historic lows has propped up demand compared to other downturns, consequently sustaining higher home prices.

“[D]eclining rates have brought borrowers back to the market but, as the spring homebuying season gets underway, low inventory remains a key challenge for prospective buyers,” said Sam Khater, chief economist at Freddie Mac, in a press statement.

At the current sales pace, unsold inventory is at a 2.6-month supply, according to NAR, which is low by historical standards, though up from 1.7 months a year ago.

“Inventory levels are still at historic lows,” said Lawrence Yun, chief economist at NAR, in a report. “Consequently, multiple offers are returning on a good number of properties.”

Based on this and other data, industry experts have a gloomy outlook on when inventory will eventually normalize.

“I believe that we’re likely to see low inventory continue to vex the housing market throughout 2023,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data. And with 70% of homeowners sitting on a mortgage rate of 4% or less, Sharga says we’re unlikely to see an inundation of homes soon.

Will the Housing Market Crash?

Due, in part, to the ongoing inventory problem keeping home prices elevated, many economists predict the housing market is more likely to correct itself from the double-digit percentage jumps seen in home prices the past few years rather than crash.

“[H]ome prices will be steady in most parts of the country with a minor change in the national median home price,” said Yun.

However, some housing market watchers believe that homes in some areas could see sales and price growth, particularly in locations where home prices have remained affordable over the past few years in relation to median income.

“We’re estimating about a 5% drop nationally,” says Sharga. “Some markets, believe it or not, will probably see prices continue to increase.”

Yun concurs, noting that home prices will see gains or declines depending on the region, with lower-priced locations likely to experience price increases and expensive areas seeing dips.

Other experts point out that today’s homeowners also stand on much more secure footing than those coming out of the 2008 financial crisis, with a high number of borrowers having positive equity in their homes. Consequently, the likelihood of a housing market crash is low.

“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow.

In a housing market crash, you would typically see a 20% to 30% drop in home prices and a decline in home sales—far more than what’s currently happening. Another crash symptom that’s been missing is a jump in foreclosure activity.

“I think we’re more likely to see the market cool, rather than crash,” Sharga says.