Home prices may fall. What does it take for an ugly slide.

Home prices continue to rise, challenging mortgage rates at 23-year highs and a housing market that hasn’t been more affordable since the 1980s. Everything looks steady on the surface, but a prolonged decline in US home prices may be just around the corner for the first time in more than a decade, according to one housing expert.

Some specific shocks can lead to this decline. If more sellers and buyers postpone their searches because they have closed due to high costs, supply will eventually outstrip demand. Economic surprises such as a recession or major layoffs can shake consumer confidence. Such uncertainties exacerbate the problems facing the housing market, and the results will affect the US economy by slowing the accumulation of household wealth and hindering consumer spending, which is an important engine of growth.

Affordable homeownership has long been considered an achievable cornerstone of the American Dream, and now that role is increasingly being called into question, says Susan Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. “This has long-term implications for the economy, prosperity and security,” he added.

Housing market speculators have been anticipating significant declines in home prices since the pandemic began. It was largely unsuccessful, as the number of buyers searching for homes outstripped the available supply. Last spring, prices fell less than 1% from a year earlier, according to the S&P CoreLogic Case-Shiller National Home Price Index, but then quickly resumed their climb to new highs.

Even with monetary policy tightening, home prices have remained broadly resilient. Prices in more than 80% of about 200 U.S. metro areas rose in the third quarter despite a decline in home affordability nationally, the National Association of Realtors said Nov. 9.

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That’s one reason why Matthew Walsh, a housing economist at Moody’s Analytics, expects prices to fall in the second half of next year for the first time in more than a decade. “Right now, the housing market is absolutely unsustainable,” Walsh said. It is estimated that prices will fall by between 3% and 4% in the last quarter of 2024 compared to the same quarter last year.

A continued decline in 2024 is not the consensus among housing economists. Many industry forecasts based on house price indexes expect prices to continue to rise broadly next year. But the supply and demand dynamics supporting this year’s home price gains are far from normal — and changing conditions could upend the market.

And with costs and mortgage rates recently rising to nearly 8%, a buyer will need to allocate more than 40% of their income to monthly payments, according to ICE Mortgage Technology — the most since 1984.

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Mortgage rates, which typically move with the 10-year Treasury yield, are another driver of demand. Interest rates have fallen as Treasury yields have fallen but that doesn’t mean they won’t rise again. Wall Street is betting that the Fed will keep interest rates steady through the end of this year, then lower them in 2024 — even though Fed Chairman Jerome Powell said on November 9 that he would consider another increase if inflation remains high. Economic growth remains strong. If that happens, Treasury yields could rise further, causing mortgage rates to rise.

Of course, buyers don’t have to buy – even if they are approaching the age at which they normally make such purchases. Rent is looking attractive with a flood of new apartments and condos hitting the market. Rents have slowed from their big gains earlier in the pandemic, with U.S. rents down 1.2% from the same time last year in October, according to ApartmentList. An increase in home purchase costs earlier this year made the monthly cost of buying a home with a 5% down payment more expensive than renting, according to a Zillow analysis provided for Baron in August.

Household balance sheets have grown during the pandemic – but a rise in loan and credit delinquencies in the third quarter highlights the double whammy of monetary policy tightening and inflation. If unemployment rates rise, potential buyers may feel too uncertain – about their jobs, their finances, and overall home prices – to take the plunge. Mortgage delinquencies are still below pre-pandemic levels but are on the rise, a trend worth monitoring in the coming year.

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Low inventory of homes for sale has kept prices high, even as rising prices and rates have depressed demand. For prices to fall, more homes will have to come on the market. The fiscal incentive to stay flat as long as mortgage rates remain well above historic lows, known as the mortgage rate stabilization effect, is often an explanation for the dearth of listings in 2023 that has supported rates. But the effect of closed reasoning may not be permanent. A recent Fannie Mae survey of homeowners found that many respondents who plan to stay in their homes longer than expected cited various reasons besides lower mortgage rates including proximity to family.

Price declines will not be uniform, and some areas with limited housing supply may not see a decline at all. Of all the metro areas CoreLogic evaluated in September, the ones most at risk of home prices falling over the next 12 months include Youngstown, Ohio; Cape Coral, Florida; Spokane, Washington; West Palm Beach, Florida; Deltona, Florida.

Price drops can also vary based on the size of the home. While larger, more expensive homes are typically a more discretionary purchase, smaller entry-level homes attract a range of buyers, from price-strapped first-time buyers to downsizers using cash. This means that prices in this range can remain more stable than for larger or more expensive homes. DR Horton (ticker: DHI), the nation’s largest homebuilder, said it expects to sell smaller homes next year as affordability headwinds persist.

For most homeowners who want to hold on to their properties for the long term, falling prices may have little visible impact. The value of a typical home in the United States is 40% higher than it was before the pandemic, according to Zillow. Even buyers who purchased their homes at the height of the housing market mania in June 2021 enjoyed a typical 17% increase in home value.

Those who have purchased recently may be more concerned about falling prices. Others who were inclined to buy may decide to take a break, says Danielle Hale, chief economist at Realtor.com. (Baron main company,

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News Corp

It owns Move, which operates the real estate listing sites Realtor.com and Move.com.)

“When prices fall, if people think it will be a sustainable decline, they will be more inclined to wait rather than rush out and buy,” she says.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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