U.S. Home Prices Drop for First Time Since 2012, But High Mortgage Rates Keep Affordability at Record Lows

For the first time in over a decade, the median U.S. home-sale price has declined on an annual basis. However, this 0.6% drop to $350,246 in February 2024 does not signal increased affordability for buyers. Elevated mortgage rates have pushed the typical monthly mortgage payment to a record high of $2,520, creating a complex and challenging market. This article breaks down the key trends, from regional price shifts to crucial indicators of buyer activity, providing a clear perspective for anyone considering a real estate transaction.

Why Are Home Prices Falling Now?

The annual price decline is a significant milestone, last seen during the recovery from the 2008 financial crisis. This shift is primarily driven by a sharp increase in mortgage rates. When average 30-year fixed rates rose to 6.65%—with a daily peak of 7.1%—homebuying demand dampened significantly. As a result, sellers have been forced to adjust their expectations and lower asking prices to attract the fewer buyers who can qualify for a loan at these rates. Essentially, high borrowing costs have cooled a market that was previously red-hot, making this price correction an expected, though notable, adjustment.

It is important to understand that this is not a market crash. As one industry expert assessed, "Home prices skyrocketed so much over the last few years that they were likely to come down once rates rose from historic lows." The decline is concentrated in specific markets, indicating a rebalancing rather than a widespread collapse.

Which Housing Markets Are Seeing the Biggest Price Changes?

The price trend is not uniform across the country. The most significant declines are occurring in markets that experienced intense growth during the pandemic and in high-cost areas of California.

Conversely, other regions continue to see price growth, with the largest increases in West Palm Beach, FL (+15%), Milwaukee, WI (+13.2%), and Columbus, OH (+9.5%). This divergence highlights the importance of local market conditions, with demand shifting to more affordable regions.

What Key Indicators Are Revealing About Buyer Activity?

Several metrics provide a deeper look into current market dynamics. While prices have softened slightly, underlying activity is mixed:

• Pending Sales: The decline in pending home sales (-15% year-over-year) was the smallest since July, suggesting a potential stabilization in demand.
• New Listings: A critical factor is the severe shortage of homes for sale. New listings plummeted by 20.3% nationally, as many potential sellers are reluctant to give up their existing low-rate mortgages. This lack of supply is helping to prop up prices despite lower demand.
• Time on Market: Homes are taking longer to sell, with a median of 50 days compared to 31 days a year ago.
• Price Reductions: The share of homes with a price drop has increased to 4.9%, up from 1.9% a year earlier, reflecting seller adaptation to the new market reality.

What Does This Mean for Homebuyers and Sellers?

Navigating this market requires a clear-eyed approach. For homebuyers, the slight dip in sale prices is largely offset by the steep rise in monthly mortgage costs. Affordability remains the primary challenge. While there may be less competition and more room for negotiation than a year ago, finding a well-priced home in a desirable neighborhood is still difficult due to low inventory.

For sellers, pricing your home correctly from the start is more critical than ever. With buyers highly sensitive to interest rates, overpriced homes are sitting on the market. However, homes that are priced competitively and in good condition are still selling, with 45% of homes going under contract within the first two weeks.

The key takeaway is that the housing market is in a period of rebalancing. Prices may decline slightly further, but a major crash is unlikely due to the fundamental lack of available homes for sale. Both buyers and sellers should base their decisions on careful financial planning and hyper-local market data, rather than waiting for a significant shift in interest rates.