Understanding Home Price Appreciation: A Look at Stabilization and Future Trends

Amid the pandemic, home appreciation experienced an unprecedented surge. We witnessed multiple offers flooding in, often resulting in homes selling for hundreds of thousands of dollars above their asking prices. It wasn't unusual to see 30 offers vying for a single property. This phenomenon led to staggering price hikes, creating an atmosphere of fervent competition.

The Shift Towards Normalcy

Today, the landscape is different. The exaggerated home price appreciation we witnessed during the pandemic has given way to a more stable and normalized market. While bidding wars and soaring offers were once the norm, we are now experiencing a return to a more typical home price growth rate, which generally hovers around 5%.To put things into perspective, the nationwide home price appreciation rate reached a staggering 18% during the peak of the frenzy, with Los Angeles seeing figures ranging from 15% to 20%. However, the market has since stabilized. The days of exponential price hikes have subsided, and we find ourselves in a more balanced real estate environment.

As we navigate this shift, it's important to recognize that transitioning to a more predictable and sustainable market is a positive development. It brings stability and ensures that the housing market remains accessible and viable for buyers and sellers alike.

A recent study reveals that U.S. home prices are returning to the normal 49-year average. Moreover, the data indicates that this appreciation aligns with the long-term historical average.

Understanding Key Terminology

Appreciation: This occurs when home prices increase.

Deceleration of Appreciation: In this case, prices continue to rise at a slower, more sustainable pace.

Depreciation: When prices decrease, which is not the case here.

The crucial takeaway is that the remarkable surge in home price growth experienced in recent years was unsustainable. It was only a matter of time before the pace slowed. We're currently observing not depreciation but rather a deceleration of appreciation—a return to a more stable trajectory.

Normal Seasonality for Home Price Appreciation

Contrary to some news reports, home prices nationwide are not in a freefall. Instead, we are witnessing a shift towards more typical patterns of price growth.

As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), puts it: 

“People should not anticipate another double-digit price appreciation. Those days are over. . . . We may return to more normal price appreciation of 4%, 5% a year.”

Why does the inventory shortage persist?

1. Mortgage Rate Lock-In Effect: Homeowners are reluctant to sell due to the fear of losing their low mortgage rates locked in during the pandemic if they move. This reluctance further constrains housing inventory.

2. Media-Induced Fear: Sensationalized media headlines create unwarranted apprehension among potential sellers, deterring them from listing their homes and exacerbating the inventory shortage.

3. Population Growth: The continuous population growth intensifies the demand for housing, further straining the already limited supply. As a result, home prices continue to rise.

4. Underbuilding by Builders: A significant contributor to low inventory is the insufficient construction of new homes in recent years. Builders have not kept pace with the demand for housing, exacerbating the housing shortage.

Future Home Price Projections

Renofi's recent research analysis reveals that over the last decade, home prices in the United States have surged by nearly 49%. What lies ahead for home prices in the next decade? The same study highlighting the 49% increase in home prices over the past ten years offers some insights. If current growth patterns persist, U.S. homes could, on average, see similar results to the past 10 years.

Market Highlights:

• Slower economic growth and cooling inflation will lead to lower mortgage interest rates in 2024.

• California's median home price is expected to climb by 6.2%. Per data from the California Association of Realtors.

• Housing supply will remain below average despite an anticipated increase in active listings.

• Chief Economist Lawrence Yun forecasts a 3% to 4% home price increase in 2024.

• Zillow projects a 3.4% increase in home values in 2024.

• The market is returning to more normal numbers, with the potential for a surge in buyers if mortgage rates approach 6% in the near future.

In summary, California's real estate market is poised for a return to stability and more typical market conditions in 2024. With favorable trends and the potential for increased buyer activity, the year ahead promises opportunities for both buyers and sellers. The real estate market is experiencing a shift towards more sustainable and predictable patterns of price growth. Understanding these trends can help you make informed decisions whether you're buying, selling, or keeping an eye on the market.

If you're prepared, capable, and eager, don't allow apprehensions to hinder you. Seize the opportunity to buy and build equity. Home prices are stable, and we are here to support you throughout your home-buying journey.