Approaching the top of the world’s steepest, tallest rollercoaster ought to feel pretty terrifying. As we in real estate approach the dive drop from a decade of rising home prices, you may want to double check your seatbelts.

Signaling the price drop to come are increasing price cuts. Here in California, the share of homes on the market with a price drop in April 2022 was:

Price cuts have remained level in San Jose, at 16%, and fallen in Fresno and Bakersfield.

While more instances of price cuts typically indicates a slowing market, the national median average days-on-market was a record-low 15 days in May 2022, down from 19 days a year earlier, according to Redfin.

A reflection of low inventory, homebuyer demand continues to outweigh supply — just no longer enough to fuel continuous price increases.

But expect this days-on-market figure to change quickly. The market is adjusting rapidly to higher interest rates and reduced buyer enthusiasm. In fact, while today’s share of price cuts is the highest since late-2019, price cuts tend to peak in the latter half of the year. To see such a steep rise in price cuts in April — still in the spring buying season — means the roller coaster is just getting started for real estate professionals.

Related article:

Behind the curtain of the Fed’s latest rate hike


Price cuts sound the alarm for future home prices

While home prices continue to rise, the housing cycle is led primarily by jobs, followed by interest rates, home sales volume and only then, home prices.

California’s jobs market has yet to recover all of the 2.8 million jobs lost at the outset of the 2020 recession, with 300,000 workers still jobless as of April 2022.

Further, mortgage interest rates began rising in January 2022, skyrocketing from near 3.00% to a whopping 5.78% as of the third week of June 2022. Today’s higher rates have resulted in a dramatic cut to buyer purchasing power, devastating the ability for mortgaged homebuyers to compete in today’s still-tight market.

Home sales volume has accordingly fallen back in 2022, the result of fewer qualified homebuyers and fewer properties being listed by would-be sellers, who are choosing to stay put rather than run the risk of being unable to find a suitable replacement property or qualify for a new mortgage.

Sticky pricing means home prices are usually the last to decline. But the dominoes are falling, and home prices are next.

California home prices have experienced an annual increase of 20% in the low tier, 25% in the mid tier and 28% in the high tier as of March 2022. This extreme pace of increase will lose all momentum in a matter of months due to each of these factors, and more: the 2020 recession is about to release its sequel on the economy — and this time, the housing market won’t escape unscathed.

Expect home prices to begin to decline in the second half of 2022, bottoming around 2025. For investors looking to take advantage of future price drops, the next predictable buy phase will arrive around 2024-2025 once prices have bottomed, jobs have fully recovered, and home sales volume begins to pick up.

Today’s increase in price cuts is just another alarm bell ringing in the housing market — for those who are willing to listen.

Real estate professionals — When you think the next recession will arrive? What will its impact be on your local housing market? Share your response in the comments below!

Related article:

Stay ahead of the next recession