Key takeaways

• Morgan Stanley has predicted a 10% drop in housing prices from June 2022 to 2024. This is juxtaposed with the 45% pricing increase the U.S. housing market saw between December 2019 and June 2022.
• Some markets are already showing a significant pricing drop, topping the list are metros like San Francisco, Seattle and San Diego.
• While house prices are likely to drop, demand for housing caused by America’s ongoing shortage is likely to prop up any cataclysmic losses for homeowners. We’re not likely looking at a 2008 situation.

Between June 2022 and the end of 2024, experts at Morgan Stanley are predicting around a 10% drop in average national housing prices. At first glance, these numbers might seem worrisome, but it’s important to consider the context.

First, this level of market cooling doesn’t necessarily indicate a “crash.” Typically, when we see a housing market crash, we’d expect to see a reduction in pricing of at least 20%. This is not anywhere near what experts are currently predicting – unless we go into a deep, dark recession that sparks high unemployment rates. Even then, it likely wouldn’t be as bad as 2008.

There are several factors buffering the market from freefall. Let’s take them into consideration before we review the cities which have been hit the hardest.

The market was in an unsustainable rally for two years

Home values have skyrocketed since the pandemic began. From December 2019 through June 2022, prices rose 45%. Even after accounting for recent price drops, home prices have increased 38% since March of 2020. This level of growth was unprecedented and unsustainable. At some point it had to slow down.

America’s housing shortage isn’t getting better

The backdrop to this is that America is, and has been, in the midst of a housing shortage – even prior to the pandemic. To fix this problem, experts at Freddie Mac and Up for Growth as recently as 2021 estimated America needs 3.8 million new homes. If you ask the National Association of Realtors, that number may be closer to 7 million new homes.

Yet, new construction is slowing down. Home starts were down 8.8% year over year between October 2021 and October 2022, and applications for permits for new builds were down 10.1% over the same time period.

This means that any decrease in home prices over the next year likely has a floor. While less people who want to buy can due to high prices, the supply shortage will hopefully keep supply from greatly outpacing demand.

The result of this equation isn’t pretty for renters – a quarter of whom already pay more than 50% of their income to their current landlord. Home prices may not come down to a point where these folks can afford to buy.

But for homeowners, it may provide some small assurance that they’re not at as high of a risk of losing their home. Even over the past few months as home prices have started to cool in most markets, foreclosure rates still haven’t reached pre-pandemic levels. And the market circumstances that caused so many to end up upside down on their mortgages in 2008 aren’t present today.

Where are home prices dropping fastest?

That doesn’t mean home prices won’t come down at all. In fact, according to the S&P Case-Shiller Index, home values were down 2.6% between June and September of 2022. They were still up 7.81% year over year, but the clip of the short-term decreases have been notable.

Most of the metro areas the S&P considers experienced a decrease over the three-month time period in 2022, but these cities saw the biggest drops:

• San Francisco: - 10.36%
• Seattle: - 9.55%
• San Diego: - 7.24%
• Los Angeles: - 5.61%
• Denver: - 5.60%
• Dallas: - 4.34%
• Portland: - 4.25%
• Las Vegas: - 3.69%

Of the two metros that were still experiencing pricing increases over a three-month period, they all saw pricing decreases from August to September of 2022.

Why are prices dropping more quickly in these cities?

The best case study might be the market that’s seen the largest price declines: San Francisco.

The San Francisco market is facing the same issues as the rest of the country: Unaffordable home prices and high (though slightly less high in November) interest rates. The biggest difference is that San Francisco had further to fall.

San Francisco has long had one of the most expensive housing markets in the country. Some of the highest prices in the nation have the furthest to fall.

San Francisco in particular has experienced a mass exodus since the pandemic began, with the county losing about 6.7% of its population between July 2020 and July 2021 alone. One explanation for this is as more positions became remote starting in March 2020, tech workers – who are heavily concentrated in this region – have reaped some of the most opportunities to work from home.

And why pay for a home in one of the most expensive real estate markets in the nation when you could live and work anywhere else?

While some workers are returning to the Bay area as some companies remove flexible working opportunities, the effects of mass remote work migrations have still made a meaningful mark on the city’s real estate market.

The other cities on the list, from Seattle to D.C., have experienced similar phenomena, though the situation of each market is partially unique.

For example, New York home prices have declined, but not as much as those in San Francisco. Companies based in New York have implemented more mandatory return-to-the-office policies, which have forced more people back into the city. This may be a partial cause for its softened price decreases when compared to San Francisco.

The bottom line

The housing market is likely to lose value through 2024, but it’s more of a market correction than a market crash. Because America has a housing shortage, demand is likely to keep home prices from descending into oblivion.