Why house prices will be less “sticky” this time.

[An earlier version of this piece appeared in Forbes.com.]

Many real estate analysts are forecasting U.S. house prices to fall because mortgage interest rates have risen so much. Some are expecting small declines, others, large, but most mention that house prices are “sticky” on the downside, and because of that they don’t expect prices to start falling until many months after house sales have started falling. Most don’t expect these sticky prices to start falling significantly until next year.

A good example of sticky house prices was in 2006. Nationally, the number of single-family houses sold fell 8% in 2006 but house prices actually went up 7% in 2006 before they started to tank in 2007. The number of houses sold fell long before house prices because, as economists like to say, house prices are sticky on the downside.

House prices don’t fall right away because some sellers will decide not to sell if they can’t get the price they want anymore. Many other sellers still want to sell but emotionally they have trouble accepting that prices are actually falling so they’re slow to lower their asking prices. They get paralyzed thinking about how much more money they could have made if they had sold at the top of the market. 

In our coming house price correction, prices will still be sticky on the downside but two changes since 2006 will make prices a lot less sticky. First, home buyers and sellers have a lot more information about the real estate market today and, second, landlords have bought a lot more single-family houses in recent years than they did last time.

More Landlords

In a falling market, it’s a lot easier for landlords to sell than for families who live in the houses they own. The families would have to find new places to live if they sold. Not so for landlords.

Investors purchased a record 21% of single-family houses sold in the U.S. in the first quarter of 2022, according to Redfin. In the first quarter of 2006, investors only bought 10%. Having double the landlord purchases should make house prices less sticky on the downside than in 2006 because it’s easier for landlords to sell when prices start falling.

More Data

A much larger difference between 2006 and 2022 is the amount of information available about the real estate market. This may be hard to believe today, but it wasn’t easy to find the sold prices of the houses in your neighborhood in 2006. Zillow didn’t exist until 2006! Today, asking prices and sold prices are all over the internet.

A common explanation of the 2000s boom was that it was a credit bubble. Today, we don’t have all those exotic Liar’s Loans, negative amortization, and interest-only mortgages but, nevertheless, house prices increased faster in 2021 despite not having a credit boom.

Instead of being caused by a credit boom, the pandemic housing boom was caused by sharply falling mortgage rates and a change in the demand for houses caused by the pandemic. But a critical factor that amplified the recent boom is usually ignored. No matter what caused the boom, the huge amount of online information home buyers and sellers had access to increased the speed and height of the boom. 

Buyers and sellers could see for themselves how fast house prices were increasing. Buyers felt less fear offering more than the asking price because they could easily see online how fast prices were skyrocketing and how common it was for houses to sell over the asking price. 

The huge amount of information available to house buyers and sellers today reinforces any upward price momentum so prices go up faster and further. With so much information online, buyers respond more quickly to increases in prices which increases prices even more in a feedback loop. 

In the same way, when sellers can easily see asking prices, price reductions, and declining sold prices in real-time, it should also speed up the start of our next U.S. house price correction.

And, of course, this time house sellers know prices can go down. In 2006, a lot of sellers didn’t think they could.

Less Sticky

Even though we don’t have all the crazy mortgages of the 2000s, today we have a lot more landlord-owned single-family houses, and everyone has easy access to a ton more information about current, local house price trends.

We will still have sellers who are slow to lower their asking prices in softening markets but since they have so much more real-time information about the market, they will likely lower their prices faster and house prices will probably start to fall a lot sooner after sales start to fall.

House prices have already started falling in Canada and Australia and in some cities, the declines have been shockingly steep. If house prices are less sticky on the downside than experts expect, prices will fall sooner and more steeply in the U.S. as well.

Political Impact

One last point. If house prices start to fall soon–even if only a little bit–it could have a big impact on the elections this November. Here’s a recent Forbes.com article discussing the impact of house prices on elections.