According to headlines, some markets are seeing a decline in home prices. And here’s what you need to know if you’re starting to doubt your plans because of what you’re reading in the media.
It’s true that some metro areas are experiencing modest price reductions. But don’t let that take precedence over this straightforward reality. As you can see from the graph below, home values nearly always increase over time:
Although the 2008 housing crisis is still fresh in everyone’s mind, it was the exception rather than the rule. It had never occurred before and has never occurred again. Additionally, a lot of market dynamics were very different in those days. It was significantly different from the current state of the national housing market, with lax lending standards, low homeowner equity, and even a significant overabundance of homes. Therefore, there’s no need to be alarmed by every headline about prices dipping, normalizing, or slowing down.
This explains why short-term declines are typically not a deal-breaker in the long run.
What’s the Five-Year Rule?
The five-year rule may be discussed in real estate. The premise is that short-term price declines typically don’t hurt you much if you intend to own your home for at least five years. This is due to the fact that home values nearly always increase over time. Prices usually recover (and then some) over time, even if they decline slightly for a year or two.
As stated by ResiClub co-founder Lance Lambert:
“. . . there’s the ‘five-year rule of thumb’ in real estate—which suggests that most buyers can buffer themselves from mild short-term declines if they plan to own a property for at least that amount of time.”
What’s Happening in Today’s Market?
Here’s something else to calm you down. Although not as quickly as they did a few years ago, home prices are still rising in the majority of housing markets today.
However, the average decline since April 2024 is only roughly -2.9% in the major metro areas where prices are beginning to level off a bit (shown by the red bars in the graph below). It’s not as big of a drop as what we witnessed in 2008.
And as you can see from the graph below, prices in the majority of those markets have increased dramatically from where they were five years ago (the blue bars). According to the graph below, homeowners who have owned their home for a few years or longer are still ahead:
The Big Picture
According to the Federal Housing Finance Agency (FHFA), home prices have increased by an astounding 55% in the last five years. Therefore, a slight short-term decline is not a substantial loss. You’re still up much more than that, even if your city is down about 2%.
Additionally, if you use FHFA data to further break down those 5-year gains, you’ll see that home values have increased in every state over the past five years (see map below):
Therefore, it’s crucial to avoid worrying excessively about this month’s or even this year’s events. Your home will probably appreciate in value over time if you plan to stay in it for the long run, as most homeowners do.
Bottom Line
Indeed, short-term price changes are possible. However, historical data indicates that home values nearly always increase over a five-year period. Therefore, keep in mind the five-year rule and find solace in the long term, regardless of whether you’re considering buying or selling.