After several years of climbing home prices and even mortgage interest rates, both investors and homebuyers are asking the pivotal question: when will housing prices drop? The answer to that question can have a profound effect on the real estate market, impacting decision-making for homebuyers, homeowners looking to potentially purchase a second home and investors hinging on the trajectory of home values in the near future.
At Defy Mortgage, we offer comprehensive, fully customizable loan options to borrowers of various incomes and backgrounds. Whether you’re a first-time homebuyer looking for an FHA loan or a real estate investor seeking affordable investment property loans, we have the tools and expertise to help you realize your financial goals.
While we can’t offer you financial advice, we can discuss the latest expert opinions on this topic to help you easily understand the overall outlook towards housing prices. In this guide, we’ll also cover factors that contribute to housing price drops, as well as the steps investors often take to mitigate them.
Expert Predictions for Housing Prices in 2025
The general consensus around when will housing prices drop is that it won’t happen anytime soon, with many experts agreeing with Fannie Mae’s price hike projection of up to 3.8% by November 2025. Still, this is a deceleration from the 2024 price hike of 5.2%.
- Price Hike Deceleration: The price hike slowdowns are expected to continue through 2026, decreasing to 3.6% in 2026 amid growing inventory and slower home sales. Areas such as Miami, San Diego, and Atlanta all saw over 20% decreases in pending sales.
- Overall Home Sales Recovery: 2023 and 2024 were noted as being a 30-year all-time-low period for the number of homes sold in the US, with existing home sales dropping to as low as 4 million, as opposed to just below 6 million on average from 2005 to 2020. However, the National Association of Realtors notes an uptick in sales by 2.2% in December 2024, with sales expected to accelerate further through 2025 and 2026.
- Localized Price Drops: While prices rise across the board, Bank of America states that areas like Austin and Tampa may see further decreases in prices this year, following a price drop of 3.5% in 2024 due to factors such as new construction, more affordable rent, and more homeowners leaving the area because of rising property taxes and other costs.
Although prices aren’t going down anytime soon, there is a silver lining if you’re a homeowner or planning to purchase in the near future. Establishing home equity is always a good thing, and with the current environment of slow and steady growth, you’re more certain that your investment will retain its value over the long term.
Will the Housing Market Crash in 2025?
Although signs of an eventual descent are becoming more frequent, the majority of economists say that a housing market crash is highly unlikely, unless something significantly changes the economic outlook.
This means that the housing market is more or less stable. With prices expected to rise through the end of the decade, investor confidence is likely to remain at current levels. Crashes tend to have a cascading effect, affecting markets and sectors that would otherwise be healthy. This creates widespread uncertainty, as investors panic and exit the market.
With minimal risk of this occurring, investors are encouraged to stay in the market, contributing to its overall health. For homeowners, this means that their investment is preserved for the foreseeable future, safe from sudden devaluation.
For homebuyers, healthy market activity potentially increases lender liquidity, which can make it easier to get a mortgage. An active market means that more borrowers are taking out mortgages, and continued appreciation contributes to a lower risk of default. Investors will also see favorable activity levels and be encouraged to purchase mortgage bonds.
Refinance Boom in 2025?
In a surprising turn of events for the mortgage industry, refinance activity has demonstrated remarkable resilience despite challenging market conditions. According to recent data from ATTOM, refinance volume climbed to its highest level since mid-2022 during the final months of 2024, defying conventional wisdom about interest rate sensitivity.
This counterintuitive trend emerged despite steadily increasing interest rates throughout the fourth quarter of 2024. The data reveals a substantial 6.4% jump in refinance activity as the year concluded, suggesting homeowners were strategically positioning themselves to secure more favorable loan terms before anticipated further rate increases.
This unexpected refinance resurgence appears to be part of a broader recovery in the mortgage market. ATTOM’s figures show total mortgage originations increased by 14% for the full year in 2024 compared to 2023’s depressed levels, indicating a gradual healing of the housing finance ecosystem. This shift may prove particularly significant given the continued constraints in the purchase market due to limited housing inventory and affordability challenges.
If current trends continue, 2025 could witness a refinance boom that reshapes the mortgage landscape and provides valuable financial flexibility to millions of American homeowners.
Factors That Could Lead to a Housing Price Drop
Widespread price drops are often caused by certain economic factors that affect buyer purchasing power and demand for houses as opposed to renting or other housing options. Let’s explore these key drivers of housing prices:
1. Increased Housing Supply
An oversupply of homes can ease the upward pressure on prices. As new construction ramps up or more existing homes hit the market, there can end up being more than enough supply to meet demand, leading to price corrections. When buyers have an abundance of options, price increases may slow down due to sellers lowering their prices to compete in a buyer’s market.
This happened on a large scale in 2005-2006, only a few years prior to the Great Recession of 2008, when the U.S. experienced a significant housing market correction due to an oversupply of homes. This came after a hyperactive market caused a bubble that burst after higher mortgage rates decreased home affordability, subsequently leading to speculative investors pulling out. As sales volumes decreased by over 10%, existing home inventories went up 39% in a single year, leading to a substantial price drop.
2. Rising Interest Rates
Mortgage rates usually rise in response to economic conditions, such as job growth leading to increased demand. The Federal Reserve can also indirectly impact housing affordability by raising the Fed funds rate to temper inflation, which can cause a mortgage rate hike unless other factors influence it otherwise.
Although higher mortgage rates initially mean higher overall housing costs, they can also cause prices to drop if no one can afford them. As mortgage rates rise, fewer buyers will be able to qualify for loans, cooling the demand for houses. Those who can qualify may be forced to lower their offers in an effort to minimize their total mortgage payments over the life of the loan.
With more and more people only being able to afford to offer low amounts, some sellers will eventually have no choice but to accept those lower offers or continue holding onto their inventory indefinitely. Once these offers have been accepted, other sellers may begin lowering their asking prices in anticipation, beginning the downward trend of prices.
A steady downturn in demand following mortgage rate hikes was seen in 2023, which was called the slowest year for home sales in the US in almost 30 years, primarily attributed to high mortgage rates. This led to a nationwide median home price drop of as low as $418,500 in Q2 2023, down from $442,600 in Q4 2022. Some areas were more affected than others, with others even raising their prices amid plummeting demand.
3. Economic Slowdowns
A broader economic downturn can weaken consumer confidence and reduce purchasing power, leading to fewer buyers in the market and, subsequently, lower home prices. This mechanism was evident during the Great Recession in the United States. The Great Recession, which began in December 2007 and lasted until June 2009, centered on the failure of subprime mortgages due to risky lending practices.
The defaults on these mortgages caused some financial institutions to go bankrupt, which had a cascading effect on the economy and led to massive layoffs in every sector. With many people without jobs, housing demand fell precipitously, made worse by the surviving banks tightening their lending standards to an extreme degree to cope with their losses. Home values during this period fell by a staggering 16.7%.
How Investors Can Prepare for a Potential Price Drop
Preparing for a potential decline in housing prices involves proactive strategies that help mitigate risks and take advantage of market opportunities. The steps you should take will ultimately depend on what’s best for your personal and financial goals. That said, here are some approaches often taken by real estate investors to protect themselves from potential price drops:
1. Diversify Your Investment Portfolio
Diversification ensures that you don’t “put all your eggs in one basket”. Property prices can vary significantly between regions, counties, and even zip codes. Spreading out your investments across various areas and property types reduces risk by insulating the rest of your portfolio against downturns in a specific sector of the market.
2. Leverage DSCR Loans for Income-Generating Properties
DSCR or debt service coverage ratio loans allow investors to qualify for financing without the need for personal income or employment information. This makes them particularly valuable during economic downturns when personal incomes may be unstable. DSCR loans are designed to make it more accessible and affordable to operate a rental property, which can give you a consistent income stream even through market dips when it may be disadvantageous to sell.
3. Build Robust Financial Reserves
Building robust financial reserves is essential for real estate investors to navigate market downturns and seize emerging opportunities. While it makes sense to store wealth in ways that are more insulated against inflation, it’s also worth keeping a certain amount of cash ready, in the event that economic conditions make it difficult to sell your assets, or if doing so would come at an enormous loss. Maintaining ample cash reserves makes you ready to manage unexpected expenses, cover property maintenance, and capitalize on favorable deals as prices decline.
4. Monitor Economic Indicators and Market Trends
Staying informed about market trends and economic indicators is crucial for investors to anticipate shifts and adjust their strategies accordingly. Economic indicators such as GDP growth, inflation rates, interest rates, and unemployment rates significantly influence the real estate market. Monitoring these factors will enable you to make informed decisions and capitalize on emerging opportunities.
In the United States, monitoring foreclosure rates can provide insights into market stability. A decrease in foreclosure filings, as observed in 2024, may indicate a stabilization of the housing market after years of instability. This trend suggests a return to more predictable levels of foreclosures, which could be indicative of careful lending practices and ongoing homeowner resilience.
5. Consider Long-Term Investment Perspectives
Focusing on long-term returns rather than short-term fluctuations is crucial for navigating market volatility. A patient, long-term outlook can help you ride out temporary market corrections and benefit from overall market growth.
DSCR Loans: A Smart Financing Strategy for 2025
As we move further into 2025, the housing market continues to show signs of potential shifts in property values, even though there hasn’t been much movement yet. As discussed above, one of the ways investors insulate themselves against price drops is by using DSCR loans to purchase lucrative income-generating properties. Here’s why DSCR loans can be a smart financing strategy:
- Rental Income Basis: The chief advantage of a DSCR loan is that loan terms, such as amount and rate, are determined by rental income potential. This means that if you can find a property with solid income potential and has historically proven to have consistent rental income even during poor economic conditions, you can get highly competitive rates for it, even at relatively low credit.
- Long-term Gains: Operating a rental property can provide you with favorable returns in the long run compared to flipping properties. Selling instead of renting can make you more vulnerable to price drops, as prices can take a long time to readjust to a point where you won’t have to sell your property at a loss.
- No Hard Property Limit: As long as you can maintain lender confidence that you can manage even more income-generating properties, you can keep using DSCR loans to expand your portfolio. As opposed to flipping, this allows you to keep collecting rental income on your properties until such time that prices recover enough for you to sell at a desirable profit.
When Will Housing Prices Drop FAQ
How can investors identify undervalued properties in a cooling market?
Being on the market for an extended period or having prices remain unchanged despite local trends could be signs that a property is undervalued. Homes in need of significant renovations or repairs may also be priced below market value, offering potential for profit through improvements with a construction loan or fix-and-flip loan.
Which regions are most likely to experience price drops?
Regions that have historically shown sensitivity to economic conditions, such as rapid price growth during boom years, are often more susceptible to economic downturns as well. This includes urban areas with high levels of new construction, areas popular for speculative investments, and regions reliant on industries that are sensitive to economic cycles, such as technology or finance.
How do rising interest rates impact housing prices?
Rising interest rates increase the cost of borrowing, reducing the affordability of homes and therefore the number of buyers qualifying for loans. With less competition among buyers, sellers may be forced to lower their asking prices, causing a downward pressure on property values. This is why in some cases, higher rates may cool down previously overheated markets.
Is it a good idea to invest in real estate during a price correction?
Investing in real estate during a price correction can be a good opportunity, as long as the investor is focused on long-term returns and is prepared for potential short-term volatility. However, it’s important to assess the underlying fundamentals of the market, such as local economic conditions and property cash flow, to ensure the investment will be profitable over time. A long-term perspective is key to riding out the temporary fluctuations during price corrections.
What is the role of DSCR loans during housing market fluctuations?
DSCR loans allow investors to access funding on terms determined by income generation potential rather than variable property values. This can make it easier to secure a property when lenders are more cautious to approve conventional loans, which also take into account the collateral value of a property.
Key Takeaway
Whether you’re looking to purchase a new home or invest in residential real estate, your best move can depend on when will housing prices drop. While house prices have only continued to grow in recent years in spite of falling demand, experts agree that this trend is slowing down.
Although we likely won’t see price drops across the board until the decade is out, experts believe prices are soon to stabilize. Meanwhile, demand and prices have continued to fall in specific areas, which could make them ideal for those seeking more affordable properties.
Many aspiring homeowners may find it best to purchase homes as prices are projected to keep rising, albeit at a slower rate than before. Investors, on the other hand, can benefit from the growing home prices across the US if they’re already holding properties but may find it difficult to sell if demand or purchasing power are low in a given area. DSCR loans can help supplement cash flow through low-demand periods by making it easier to secure properties that can provide consistent rental income.
Would you like to learn more about your investment real estate loan options? Book a free consultation with Defy today and let’s talk about the next phase of your investment strategy. Alternatively, if you would like to take advantage of the rising property values, a home equity loan or HELOC might align better with your goals.
