What Is a Housing Market Price Correction?
Here's what you need to know about a housing market correction, how it compares to a housing market crash, and whether the current market is enduring a correction.
As a homeowner or would-be homeowner, news of housing market conditions can feel stressful – especially when you haven’t endured those conditions in the past.
But not all terms are as complicated as they may seem, or as scary for you as a homeowner. While a housing price correction or housing market correction describes a drop in home prices, it’s not necessarily bad for homeowners – and can even help homebuyers who are struggling to afford a home purchase.
We’re breaking down the basics of what a housing market price correction is, and whether current housing market activity is indicative of a price correction.
What Is a Housing Market Correction or Price Correction in Real Estate?
A housing market correction occurs when home prices drop slightly. There is no formal threshold of dropping home prices that determines a correction, but a drop of 10% or less is commonly used.
The use of the term “correction” indicates that prices have in some way become unsustainable, so the market is correcting itself to better fit with affordability, demand and supply.
“When we talk about a price correction what we’re really looking at is prices that have been appreciating really aggressively and all of a sudden that slows down rapidly,” says Nicole Bachaud, senior economist at Zillow.
How Long Does a Market Correction Last?
Similar to the fact that there’s no specific percentage that home prices will drop in a price correction, there’s also no defined timeline. “A price correction is not a thing that happens and you can expect it to go away after a period of time,” Bachaud says.
In an instance where home prices in a local market decline slightly and never pick back up again, it’s likely an indicator of greater decline in housing demand – people may have stopped moving to the area and the population is declining, for example.
A price correction can be as short as a couple of months or be drawn out over a year or more. Bachaud points to a relatively brief market correction that occurred in the latter part of 2018 and early 2019. When interest rates rose slightly, combined with high home prices at the time, many homebuyers in coastal markets stopped making offers because they had concluded the market was too expensive. The market corrected with a downward shift in interest rates and a deceleration in home price increases.
Other economic conditions can extend the duration of a correction. In 2018 and 2019 the economy was fairly strong. On the other hand, “if you’re in a recession period, it might be a really, really long time,” Bachaud says.
Are We in a Market Correction Right Now?
The short answer is never quite what you want to know: maybe. It’s often difficult to make a declarative statement about current conditions until they have been evident for some time.
There are a few indicators that point to a correction occurring either now or in the near future for the housing market on a national scale, however.
This first is the Federal Reserve’s stated goals behind the continued increase in interest rates. In September, Fed Chair Jerome Powell said home prices have increased at an unsustainable rate, and named a correction specifically as the most likely fix.
After the Nov. 2 Federal Open Market Committee meeting in Washington, Powell spoke again of the housing market during a press conference.
“Activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates,” Powell said. The average interest rate for a 30-year, fixed-rate mortgage as of Nov. 3 was 6.95%, according to Freddie Mac, though the average interest rate was reported over 7% for the first time in over a decade in the last week of October.
The median existing-home sales price in the U.S. was $384,800 in September, according to the National Association of Realtors, down from the sales price peak of $418,800 in July though still 8.4% higher than September 2021.
The month-over-month declines in home prices could be a sign of a price correction. “It is possible – we have seen a really sharp run-up in home prices. So it is possible,” says Danielle Hale, chief economist at Realtor.com. “It is also possible that prices just move sideways.”
A sideways movement of home prices would be more of a plateau than a correction. Rather than seeing prices decline to reset the market, “we may just see fewer transactions,” Hale says.
Another contributing factor that could make a market correction less likely, or at least less long-lived, is the lack of housing inventory compared to the number of households in the U.S. “Even though we’re seeing demand fall back … the supply is not there,” Bachaud says.
High-interest rates have contributed to falling homebuilder confidence, based on the National Association of Home Builders and Wells Fargo Housing Market Index. The HMI in October was 38, indicating low builder confidence in the sales of new homes based on current market conditions. Low confidence among builders often leads to a slowdown in new home construction projects.
While Bachaud notes that future events are hard to predict, she says she expects the housing market to return to more historical norms for price appreciation around the end of 2023 and in 2024. Still, “It’s probably not going to get a whole lot more affordable any time soon.”
Housing Market Correction vs. Housing Market Crash
In a case of more dramatically dropping home prices, a housing crash could occur – and it would typically be more obvious than a correction. During the housing crash that went hand-in-hand with the Great Recession, home prices fell by more than 30% in many markets.
Based on current housing market conditions, such an accelerated drop in home prices seems unlikely. A factor that makes a housing correction more likely than a housing crash is the relative financial stability of homeowners today compared with during the Great Recession. Homeowners today are less likely to default on their homes in the current economic environment.
“We didn't see in this cycle the kinds of poor credit underwriting that we saw before the global financial courses. Housing credit was very carefully, much more carefully, managed by the lenders so it's a very different situation and doesn't … appear to present financial stability issues,” Powell said during the press conference on Nov. 2.
