What is a housing market price correction?

As a homeowner or future homeowner, news about housing market conditions can be stressful, especially when you haven’t endured these conditions in the past.

But not all terms are as complicated as they may seem, or as scary for you as the owner. Although a house price correction or housing market correction describes a decline in home prices, it is not necessarily bad for homeowners – and may even help buyers who are struggling to afford the buying a house.

We break down the basics of what a housing market price correction is and whether current housing market activity is indicative of a price correction.

A housing market correction occurs when house prices fall slightly. There is no formal house price decline threshold that determines a correction, but a decline of 10% or less is commonly used.

The use of the term “correction” indicates that prices have somehow become unsustainable, so the market is correcting to better adjust to affordability, demand, and supply.

“When we’re talking about a price correction, what we’re really looking for are prices that have appreciated very aggressively and all of a sudden are slowing down quickly,” says Nicole Bachaud, senior economist at Zillow. .

Similar to the fact that there is no specific percentage that house prices will fall during a price correction, there is also no set time frame. “A price correction is not something that happens and you can expect it to go away after a while,” says Bachaud.

In a case where house prices in a local market go down slightly and never go back up, this is likely an indicator of a bigger drop in demand for housing – people may have stopped moving to the area and the population decreases, for example.

A price correction can be as short as a few months or span a year or more. Bachaud points to a relatively brief market correction that occurred in late 2018 and early 2019. When interest rates rose slightly, combined with high home prices at the time, many homebuyers in the coastal markets stopped making offers because they had concluded that the market was too expensive. The market corrected with lower interest rates and a deceleration in the rise in house prices.

Other economic conditions may prolong the duration of a correction. In 2018 and 2019, the economy was quite strong. On the other hand, “if you’re in a recession, it can be very, very long,” says Bachaud.

The short answer is never quite what you want to know: maybe. It is often difficult to make a declarative statement about current conditions until they have been evident for some time.

However, a few indicators point to an ongoing or near-future correction for the nationwide housing market.

This first is the stated goals of the Federal Reserve behind the continued increase in interest rates. In September, Fed Chairman Jerome Powell said house prices had risen at an unsustainable rate and named a correction specifically as the most likely fix.

“Activity in the housing sector has weakened significantly, largely reflecting rising mortgage rates,” Powell said. The average interest rate for a 30-year fixed-rate mortgage as of November 3 was 6.95%, according to Freddie Mac, although the average interest rate rose above 7% for the first time in more than a decade last week. of October.

The median sale price of existing homes in the United States was $384,800 in September, according to the National Association of Realtors, down from the sale price peak of $418,800 in July but still 8 years higher. 4% to that of September 2021.

Falling house prices month over month could be a sign of a price correction. “It’s possible – we’ve seen a very strong increase in house prices. So it’s possible,” says Danielle Hale, chief economist at Realtor.com. “It’s also possible that prices are simply moving laterally.”

A sideways movement in house prices would be more like a plateau than a correction. Rather than see prices drop to reset the market, “we might just see fewer trades,” Hale says.

Another contributing factor that could make a market correction less likely, or at least less sustainable, is the lack of housing inventory relative to the number of households in the United States. “Even though we see demand shrinking…the supply isn’t there,” says Bachaud.

High interest rates have contributed to declining homebuilder confidence, according to the National Association of Home Builders and the Wells Fargo Housing Market Index. The HMI in October was 38, indicating low builder confidence in new home sales based on current market conditions. Lack of builder confidence often leads to a slowdown in new home construction projects.

Although Bachaud notes that future events are difficult to predict, she says she expects the housing market to return to more historic norms of price appreciation towards the end of 2023 and into 2024. Still, “it probably won’t be much more affordable. anytime soon.

In the event of a more dramatic drop in house prices, a real estate crash could occur – and it would usually be more obvious than a correction. During the housing crash that accompanied the Great Recession, house prices fell by more than 30% in many markets.

Given current housing market conditions, such an accelerated decline in home prices seems unlikely. One factor that makes a housing correction more likely than a real estate crash is the relative financial stability of homeowners today compared to the Great Recession. Homeowners today are less likely to default on their homes in the current economic environment.

“We haven’t seen in this cycle the kinds of bad credit underwriting that we saw before global financial prices. Mortgage has been very, much more carefully managed by lenders, so it’s a very different situation and doesn’t…seem to have financial stability issues,” Powell said at the Nov. 2 press conference.