The Housing Market Correction Is Spreading

0:00Dave:There has been a noticeable and measurable shift in the housing market in just the last couple of weeks. And the housing market correction that we are in is about to get worse. People of late have had all sorts of hot and frankly bad takes about the housing market. A lot of people saying it's going to crash. Other people are saying it's about to pop. But neither of these predictions have been right. Instead, my somewhat boring predictions about a slowly correcting market have been right for several years in a row. And while we are all hoping for a recovery in affordability and rates and prices, the data is telling me we might be moving further away from that, not closer.

0:44Dave:So in today's episode of On the Market, I am going to share the most recent trends in the housing market and help you make sense of where the market is going. This isn't going to be crash, doomer talk, or overly rosy real estate boosterism. This is just my real, honest take about where this market is heading, why investors need to be extra careful right now, and where the true opportunities lie. This is On The Market. Let's get to it.

1:15Hey, everyone.

1:16Dave:Welcome to On The Market. I'm Dave Meyer, real estate investor, housing analyst, and chief investment officer at BiggerPockets. In today's episode of the show, I'm going to address the biggest question in the housing market, and we're doing it head on. What happens next in the housing market? We've had years of stagnation and slow sales, and everyone in the industry seems to keep saying relief is just around the corner. Well, I'll skip right to the point. I don't think relief is right around the corner. I think we're in for some more difficult times. I think the correction we've been in for a few years now is likely to drag on and perhaps even get worse in the coming year or so.

1:58Dave:And please note, I am not saying a crash. I am being very intentional about this. What I am saying is a elongation and a potential steepening of the correction. I've been saying that we're in for a while. So I just want to make that clear. And I'm going to share the reasons why this is my read throughout this episode with actual evidence with actual data and analysis, not just clickbait. Because I think if you address these things head on, you can actually plan. You can actually do something about it instead of be frozen with fear or waiting for some recovery that might not happen in the next year or two.

2:34Dave:And we all need to recognize that every market has opportunity, but we can't spot those opportunities if we're in denial about what is actually happening. So let's talk about the real data, the real information, and where we're going. First up, we are in a housing correction. Yes, the nominal home price of homes, like the price you see on Zillow, the price that gets put on the contract, the price you even see in the Case-Shiller Index, that is going up. The non - inflation adjusted price is going up. But if you look at what is really going on behind the scenes, what you see is that real home prices, and when I say real in this context, quote unquote real, that's just an economic term for inflation adjusted.

3:20Dave:And so when you look at real home prices, they are going down. Just as an example, if a property goes up one and a half percent, that's about where most people say appreciation's been in the last year, but everything else went up in price three and a half percent, your home price is not keeping up with inflation. That is a real, quote unquote, real decline. And this is really important. And it's not some like academic distinction that I'm just trying to call out. It's basically how every housing correction works outside of 2008. That was very different. We had nominal declines. Usually the way housing price is correct is through inflation.

4:02Dave:Everything else going up, hopefully including wages, faster than home prices. And that restores affordability. Now, this is not where anyone wants to be, right? If you're investing in a property because you wanted to appreciate as an asset and it's going up slower than inflation, that's not great. If you're leveraged, if you're using a loan, you are protected a little bit from this. So you're not in as bad of a position if you bought for all cash. But still, as an investor, you don't want to see prices going down in real terms. And although this has been happening for a while and it is real and measurable, it is not a crash.

4:39Dave:I just want to call this out because they actually track these things. And according to the Case Shiller and a great blog called the Calculator Risk Blog, home prices right now are 4.8 % below their 2022 peak. So let's just round and call it 5%. They're about 5 % below in inflation-adjusted terms where they were in 2022. So this is why I'd call it a correction, not a crash. In four years, it's gone down 5%. That's averaging about one and a quarter percent decline over four years. That is not a crash. That is a correction. But the reason I'm saying that I think the correction is going to get worse, and we have a lot of reasons.

5:19Dave:I'm going to get into all of them. But one of the reasons is that this gap has been getting bigger. In early 2026, the beginning of this year, it was down about two and a half percent from peak. Then it went to 3.7, 4.1, 4.4. Now it's at 4.8. So we're getting further and further off peak pricing. And so if you're tracking evidence of my thesis that the correction is getting worse, here's exhibit A. Real home prices are getting further away from their peak. We are 48 months past the real peak. And I'll talk about this at BBCon next week. But the historical template for this pattern is that you see these long corrections that they usually last seven years or longer.

6:01Dave:We're only four years in. So every time is different. Every cycle is different. But there is precedent for real home prices to stay flat or negative for years to come. And I'll share some more reasons why I think that is going to be the case. Now, despite this evidence, you're probably not hearing anyone call it a correction because the nominal headline home price is still positive, right? If you look at NIRs, August median,$429 ,000 up 1.5%. It's gone up 38 straight months despite interest rates going up. And that's all technically true, but I think it's obscuring what I was just talking about, that real prices are going down.

6:43Dave:But there are a couple other things that I think are deceiving about the fact that this home prices are up 1.6%. I did a whole show on this, I think back in like May or June. So you can check this out. But the first one is concessions. A concession is basically instead of negotiating on price, sellers give you something else. So this might be a rate buy down. It could be cash back at closing. It could be fixing something, making some upgrades, whatever it is, right? Maybe they list it for 420 and on the contract it says 420. But when you actually figure out what you're paying minus all the ad backs they give to you or rate buy down, maybe you're paying closer to 410 or 405 or 400.

7:26Dave:And the median home sale data does not reflect concessions. It doesn't show that. But what we know from other analyses of that, concessions are up. As of August, according to Redfin, 45 % of homes had a seller concession, so nearly half. So you have to extrapolate this and think, yeah, on paper, they're up 1.5%, but if you factored in those concessions, are they really still up 1.5 %? My gut says no. We don't actually have great data about this, unfortunately. I've seen some estimates that say it's like 6 % to 8 % is the average concession. but that's not the best data. We have some data about new home sale concessions, which I'll talk about in just a second.

8:12Dave:But just on the concession thing, I just want to call out that this trend is just increasing. It's going up and up and up. Like a year ago, it was about 42%. Now it's at 45%. Maybe it doesn't sound like a lot, but that's enough to start shifting us from mildly positive in nominal terms to mildly negative, right? That is important. We're also seeing that 16 % of home prices are having both the price drop and concessions, right? So we're seeing that's just a sign of distress. If you are looking at a seller who's willing to drop price and give a concession, that is a motivated seller. And so we're seeing 16 % of these kinds of listings motivated, that's a high number, a really high number.

8:58Dave:And of course, this is national and we have to look at different regions here. But this is an important trend that is probably disguising what is really going on in the market. Now, if you're in a market where these concessions are up, you're probably noticing this, right? Atlanta, 73 percent. Nashville, 76 percent. Charlotte, 68%. Phoenix, 67%, right? In those markets, you'd be crazy to not get a concession. So in a market like that, I don't believe the median home price. I would have to discount it 1%, 2%, 3 % at least to account for concessions, what people are actually paying for. Because it's a fair comparison because concessions during COVID were basically non-existent.

9:43Dave:And so you have to assume any concessions that you're getting now is a change from what was going on during COVID. And so I think from a data perspective, it's fair to assume that concessions are dragging on the median home price in a way that wasn't happened during COVID and therefore is a change in the market. Now, I mentioned the places that are seeing huge concessions. There are places that are the opposite, right? San Jose, California, 4%. New York, 6%. San Francisco, 19%. So it really is regional, as is everything. But this is definitely a national trend that is occurring. I do want to reiterate, though, like we don't know exactly how big these concessions are.

10:25Dave:What we know for sure is how often there are concessions. There's good data on that. What I can tell you, though, is in the new home sales market with home builders, that the price reductions are around 6 % and about 40 % of builders are cutting prices. That is a lot because if you think about builders and builder incentives, they don't like cutting prices. They would rather give you concessions and other ways of enticing you and incentivizing you to buy a property because if they're building a sub development, they have 100 homes to sell. If they drop price on one of them, that lowers their comp.

11:04Dave:And so dropping prices is basically the tactic of last resort for a home builder. They'd rather give you incentives like a rate buy down. And you see this in the data, right? About two thirds of new construction homes have concessions. So that's significantly higher than the 45 % we're seeing in existing home sales. So again, good opportunity to buy new construction, calling that out there. But what we see is that even builders who don't like doing this, the average reduction in price is 6 % and they're giving these incentives. So again, another reason you have to believe that this nominal home price is not exactly what it says it is.

11:43Dave:The third reason, and again, I've talked about real versus nominal, then I talked about concessions. And the third reason I think that this correction is getting worse is that median home price is not a great metric, honestly. I know it sounds obvious and I track it and you should, but the problem with it is that it doesn't account for what we would call mix. It's kind of complicated. I'm not going to get into it. But basically, what you can distill from the data, it's the K-shaped economy, basically. There are still luxury homes that are selling, but more affordable level homes that go to the average American are sitting on the market longer.

12:21Dave:And so if you think about what that does to the data, if more expensive homes are selling and the other ones aren't, the median sale price goes up, right? Because only the high priced homes are transacting. And so there is a little bit of that going on. And you can tell that because the list price, the average list price is going down, but the sale price is going up. If you look at those two facts and those are facts, that means only the high price homes are moving. And you see that the evidence of that a lot. So again, another reason why I think that nominal home price value is not telling us the truth.

12:56Dave:Hopefully what you're seeing here is that at best, we're having negative real price growth. And I think I would argue that nominal home prices are pretty close to flat. Maybe they're up 1%, but I would say that they're pretty darn close to flat if you took out concessions and all the other adjustments that you do need to make as an analyst to figure this stuff out. So that's why even though no one is calling this a correction, we're in a correction, right? I don't know how else to call it. But the question is really, where are we going? Is the correction getting worse? Is it going to get better?

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16:09Dave:Hey everyone, welcome back to On The Market. I'm Dave Meyer. Today we're talking about the fact that we are in a correction. That's just the fact. But the real thing that we need to be discussing is where do we go from here? And as always, if we're going to try and look at where the housing market is going, it's boring. I say it all the time, but we just, we got to go to Econ 101. We're going to look at supply and demand of both sides of this market. How many people want to buy homes? How many people want to sell homes? You got to look at supply and demand. That is what actually tells us where the market is going.

16:42Dave:And what we're seeing right now is demand is softening. And this is a change in where the market was heading for the first half of this year. Now, demand from 2022 has been down for a while. So 23, 24, 25, the first half of 26, definitely lower than where it was during COVID, as you can obviously guess. Like, You don't need me to tell you that. But it wasn't terrible. It was actually better than most people thought. And actually, in the first half of this year, it was going up. Before the war in Iran started and rates started going up, we were seeing increases in demand. And we measure it by something called the Purchase Index.

17:22Dave:It's by the Mortgage Bankers Association. They track how many people apply for mortgages to buy a new home, not refis, just buying a new home. And right now, it's 230, right? That's what it is, 230. A year ago, it was 386. So that is a big decline. And the long-term average is about 470. So we're about half of the long-term average. And I think the real point here is that it's starting to go down. Like it was stable for a while in the post-COVID years. It was pretty low. Then it started to get better in 25, started to get better in 26. And now it's gone back down. It's back down to sort of where we were in 2024.

18:06Dave:So we've kind of given up two years of increasing demand. And it just makes sense with rates, right? It's going down. And it's not just this measure of demand. Another way to measure demand, a really important one, is pending home sales. This is how many homes actually sell, right? That tells you a lot about demand. Do people actually sign on the dotted line and purchase a home? Well, pending sales dropped five and a half percent year over year to the lowest point in nearly three years. Existing home sales, according to NAR, just dropped below 4 million at 3.98 million. That is the first time we've been below 4 million in more than a year.

18:45Dave:And so demand is down, right? Like that is what's happening. And I really do think it just comes down to rates, right? Like I think there's a few things going on. Rates is the primary driver. I'd say that's 70 % of it. I'm making up the 70%, but roughly, right? It's the majority of it. The other things I think are fear of job loss. There's been a lot being made about AI. It's not really coming true in every industry, but in a lot of tech industries, white collar industries, it is coming true. And so a lot of people don't wanna buy a home in that environment, right? And then the other thing is just general inflation is decreasing affordability across the board.

19:20Dave:And so if you can't afford other things like car payment or you're struggling to afford other parts of your life, less likely to go out and buy a home. Right. So all three of those things are coming together. And as I'm telling you why I think the correction is going to get worse, it's like I don't think demand is going to go up. I have a really hard time imagining what gets demand to improve in the short run. I told you on last week's episode, if you didn't listen, go back last Thursday's episode. I said whole long story about the bond market and why I don't think rates are coming down. I don't.

19:56Dave:Maybe into the high sixes, but they're not coming down in a meaningful way. At the same time, the other things that can improve affordability and increase demand are real wage growth. So people's wage is growing faster than inflation. That is not happening. Wage growth is negative right now. And the other one is price declines. And so if prices fall fast enough, yeah, more people will jump into the housing market. But as I've said before, I think we're in a correction, right? I just told you that we're 5 % off peak over four years. They're going down one and a quarter percent a year. That's not a lot.

20:31Dave:It's not really going to meaningfully change people's affordability and demand when rates are going up and their wages are going down. So maybe I'm wrong, but I just don't see the catalyst for demand to go up. And it really is regional, as always. Like you look, two of the markets I invest in, worst markets in the country for demand, Seattle and Denver. You also see places like Atlanta, San Diego, Houston, really having bad demand. Other metros, South Florida, Fort Lauderdale, Miami, West Palm Beach, those are actually growing, which is something we're going to talk about because some of the hardest hit markets are starting to recover a little bit.

21:07Dave:And that's a really important dynamic. But before we get into that, I want to talk about the supply side, because if you know a little bit about economics, you can say to yourself, if demand is going down, then we need to know what's going on with supply, because if supply goes down at the same time, it's fine. Prices stay the same. That's what's been happening the last four years. We've had lower demand, but we've also had lower supply. And that is why prices haven't crashed. And for four years, I've been saying this. Supply wasn't growing fast enough for prices to come down in a really meaningful way.

21:38Dave:That's been correct. But there is a sign that that is starting to change and that supply is going up. We're now seeing existing inventory, which is just a measure of how many homes are for sale at any given point, at 1.62 million. That's up 6 % year over year. It's the first time it's been above 1.6 million since November 2019. Now, that's not crazy inventory. Don't get me wrong. It's not running away with it. But this is a change. We haven't really had a time in the last four years where supply is going up in a meaningful way and demand is going down in a meaningful way. And if you see those two things happening, the only thing that happens is price go down.

22:19Dave:Right. That is what will happen. Now, don't get me wrong. I don't want to make this seem like it's an emergency. It's one or two months of data and we don't have any evidence that this is going to run away. And all of a sudden we're going to see massive amounts of supply or a total degradation of demand. That could happen. I think we would have to see a serious disruption to the labor market for that, like mass layoffs, a much higher unemployment rate than 4.3 percent that we're out right now. We'd have to see maybe six, seven, eight percent unemployment for that. So right now, we haven't seen evidence that it's getting out of control, but we are moving to a classic condition where nominal home prices can go down.

22:59Dave:This is a correction, right? Like we're moving further into classic correction territory from a data perspective. And if you dig into this, I think there's even more evidence of this. I think a lot of what was going on in the last couple of years, why prices didn't fail is like if sellers didn't get their price, they just delisted. They took it off the market and they just sat on it. Well, delistings have fallen a lot. They've fallen 13 % year over year. And so what that tells you is last year, sellers were pulling listings if they didn't get their number. This year, more of them are staying in the market and meeting buyer demand, which means they are lowering prices, right?

23:39Dave:We've been saying sellers can just wait and some can, but some are just saying, you know what, I'm gonna sell. Rates aren't gonna go down, so I might as well sell now. I've been waiting for three years, Conditions aren't going to get better. I've been wanting to move, so I'm going to move, right? That dynamic could be what's driving this. Now, I will keep a close eye on this and tell you if I think we're going to see a flood of supply. But right now, I do not see evidence of that. We still have the lock-in effect doing a lot of work for us here, right? We still see tons of people. 50 % of people have a mortgage below 4 % still, right?

24:13Dave:Those people don't want to move. Two-thirds are below 5%. Those people don't want to move either, right? Some of them will, but still a lot of people aren't going to do that. The second thing is if you look at distress, people who are delinquent on their mortgages, it's up, but it's still below 2019 levels. And so I'm not super concerned about that right now. I do think there's concern about people who bought since 2022. There is a survey that showed that about 50 % of people who bought since 2022 said their mortgages are unsustainable without a refi. So this is why I hate the date, the rate, marry the house nonsense, right?

24:55Dave:How many people got into these homes thinking they were going to get to refi? I think it was 80 % said they assumed rates were going to go down. They were going to be able to refi. And I know not all agents intended people to count on that, but a lot of people did. Anyway, now I'm just rambling about that. But what I will say is that I'm a little bit worried about that cohort, but that's not everyone. You're probably talking about 3 % of the mortgage market, 4 % of the mortgage market. So that could increase. That's something we're definitely going to keep an eye on. But if you look at overall inventory foreclosure, it's up, yes, from COVID levels, but it's not really that bad.