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Will House Prices Go Down? How to Make Your Own Predictions

Don't solely rely on the opinion of others. Here are the tools you need to make your own housing market predictions.


Apr 02, 2021 by Liz Brumer
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The housing market is cyclical. There are supply and demand fluctuations, market-specific drivers, and overall economic health, all of which can cause home prices to fluctuate. Considering the nationwide nominal house price index is now 40% above its 2012 low point and 4% above the peak reached in 2006, there's growing concern, with many wondering if house prices will go down in the near future.

There are hundreds of experts in the field sharing their opinions about where the housing market could be headed, but relying solely on their predictions may not be the right solution for you, especially as it relates to your localized real estate market. In this article, learn what factors should be considered to make your own predictions about house prices.

Why do housing prices fluctuate?

House prices fluctuate for a number of reasons, but the amount of inventory in the market plays the greatest role. If supply is high and demand is low, housing prices will decrease, and vice versa -- if there is great demand and low inventory, home prices will increase.

The amount of housing starts and new home inventory hitting the market can all impact the supply and demand and teeter the market into a seller's market or buyer's market. Additionally, housing affordability, mortgage rates, and an economic recession, such as one caused by the COVID-19 pandemic, can make housing prices fluctuate.

What factors to consider when analyzing the housing market

Every scenario, prediction, and occurrence of real estate market analysis comes with some inherent bias from the person making the assessment, as well as influences we simply cannot predict. But there are a set of likely factors you can consider, which will set you down a path to probable outcomes when attempting to make a housing market forecast.

  1. Extremely low prices or record-high growth typically do not stay that way forever. Just as the stock market and other investments, like gold, peak and valley, so do home values. The ensuing correction may not necessarily cause a decline in house prices, but it can certainly slow or stabilize at an equilibrium point.
  2. A rebalancing of supply and demand is an eventuality. Opportunists will meet home buyers' demand until the need is satisfied, at which point it will become less lucrative, and fewer sellers will bother to meet it. A seller's market will eventually become a buyer's market. It's just a matter of time.
  3. Affordability is key for a homeowner. Regardless of supply and demand, if house prices are outside of a homeowner's budget, there's not much they can do about it. This will eventually decrease demand and allow prices to restabilize.
  4. Interest rates affect how much people are able to or willing to spend when purchasing real estate. If interest rates are set to rise, this will have a cooling effect on home sales. Conversely, with a low interest rate, you'll see an upswing in house prices due to increased demand.
  5. A change or reduction in government intervention will certainly impact home sales. Policies can determine the number of active evictions or foreclosures, which will all impact the supply and thus decrease the average home price, as we saw in the last Great Recession.
  6. Financial markets, although distinct from the real estate market, are still able to influence home values. When people's retirements or dividend-yielding stocks are affected. so are their spending habits. If you see a correction in the financial markets, it will very likely ripple over into the housing market.

People's recent memories or experiences have a major impact on their reactions. If you got a case of poison ivy last week, you will probably be hypervigilant the next time you go for a walk in that park. If the stock market dipped last year and you lost significant value in your portfolio, you might switch the stocks you hold in your portfolio to a different commodity. If you lost your job during the last shutdown, data on a surge in coronavirus cases or the vaccine losing efficacy may send you into spending lockdown mode.

Although analyzing people's probable reactions is difficult, to say the least, obvious or mass trends can and should be taken into consideration, in addition to several other indicators mentioned above.

Will house prices go down?

History has shown us that when employment is full or near full, a correction usually follows. We are currently reaching full employment after the COVID-19 pandemic and seem to be in a rather fragile state of government stimulus and lingering uncertainty. And with the dramatic price growth, housing affordability may soon become an issue. Regardless of low inventory and strong demand, if people literally cannot afford to buy, they will be waiting it out on the sidelines.

This could lead to a correction in home values. But even if there is a so-called correction, it doesn't necessarily mean prices will plummet. There could be a gradual shift where things reach equilibrium again without a sharp decline, or we could see prices just flatten without any decline at all.

The Millionacres bottom line

Predictions will always be just that -- predictions, or educated guesses supported by data. As an investor, your job is to find the facts and indicators mentioned above and make your best guess as to where the market could be headed. You now have the tools you need and the questions to ask yourself so you can make your real estate investment decisions with confidence.

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