If you've been following the recent news stories about home sellers reducing prices, it serves as a clear illustration of how headlines tend to instill fear rather than provide clarity. Let's dive into the actual situation regarding pricing.

The fact is that home prices have increased compared to this time last year and are projected to continue rising, albeit at a slower rate.

But a recent article from Redfin points out that...

““Price Drops Hit Highest Level in 18 Months As High Rates Dampen Buyer Demand.”
”

— Redfin

It might seem like prices are going down.

While the latest report from Realtor.com reveals that 16.6% of homes on the market experienced price reductions in May, up from 12.7% last May, it does not indicate a general decline in home prices.

Understanding the variance between the listed price and the final sale price is crucial.

Understanding Asking Price vs. Sold Price

The asking price, or listing price, is the amount a seller aims to receive when putting their home up for sale. However, sellers cannot simply set any price and assume buyers will pay top dollar. In today's market, buyers are discerning and may not be willing to pay more due to factors like elevated mortgage rates. As a result, sellers may need to reconsider their pricing strategy to attract buyers in the current market conditions.

Based on market conditions and received offers, the asking price may fluctuate. If there's limited interest from buyers, the seller might lower the price to attract more attention, potentially due to initially setting it too high. Price reductions come into play here, and when you notice "price drops" in listings, it gives the impression of falling home prices.

Mike Simonsen, CEO and Founder of Altos Research, mentions:

““Not only is the share of homes with price cuts elevated compared to one year ago, but more price cuts are happening each week than last year.”
”

— Mike Simonsen, CEO and Founder of Altos Research

The final sold price is actually the amount the buyer pays once the deal is done.

Actual sold prices are continuing to increase and are projected to keep rising for at least the next five years.

What Does This Mean for Home Prices?

So, although we've seen more price reductions lately, it doesn't necessarily indicate a general drop in home values. Rather, it shows that demand is stabilizing. Consequently, sellers are reevaluating their expectations to match the current market conditions.

According to the Federal Housing Finance Agency (FHFA), home prices increased by 6.6% over the last year, showing that even with more price reductions, home values continue to grow annually, as is typical in the housing market.

The map illustrates widespread price increases across the country, suggesting that the market is not experiencing a decline.

While reductions in seller prices are frequently seen as a sign that prices could stabilize in the coming months, as anticipated by industry experts, they should not necessarily be cause for concern. According to a report by Redfin, this trend indicates that...

““. . .those metrics suggest sale-price growth could soften in the coming months as persistently high mortgage rates turn off homebuyers. For now, the median-home sale price is up 4.3% year over year to another record high. . .”
”

— Redfin

With the current tight inventory, it's more probable to see price moderation in the months ahead than actual price drops.

Why This Is Good News for Buyers and Sellers

For buyers, having more reasonable listing prices increases the likelihood of purchasing a home at a reasonable rate. It also gives you the advantage of entering the market with greater assurance, as prices are leveling off instead of constantly rising.

Understanding the importance of adjusting your asking price can help sellers secure faster sales and minimize price negotiations. By setting a realistic price initially, you can draw in more committed buyers and facilitate smoother transactions.

Bottom Line

While the increase in price reductions may appear concerning, there is no need to worry. This simply indicates a market that is adapting to changing circumstances. Home prices are still rising, albeit more gradually.