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What a difference just a few months can make. As the year comes to a close, the red-hot housing market has been brought to its knees by soaring mortgage interest rates.

It now appears to be in a standoff as just about everyone suddenly feels stuck. Home prices are beginning to fall from their peaks in some of the nation’s hottest markets—but not enough to make up for the higher mortgage rates. So more and more buyers simply can’t afford to buy. Sellers, who are typically also buyers, don’t want to give up their low mortgage rates to purchase new properties. Renters can’t afford to move. And many new homeowners fear they bought at the peak of a rapidly deteriorating market.

“No one wants to catch a falling knife,” says economist Yelena Maleyev of KPMG US. “No one wants to buy in a market when prices are falling. You want to wait it out.”

So what’s next as 2022 comes to an end? Will mortgage rates continue to rise? Could prices come down even more? And will buyers return to the market?

“There is definitely a belief that home prices will go down. So consumers are saying, ‘Why would I buy now if prices are lower in two months’ time or three months’ time?’” says Ali Wolf, chief economist of Zonda, a real estate consultancy.

“That mindset is freezing the housing market.”

In the past year, mortgage rates have risen from just under 3% to more than 7% for 30-year fixed-rate loans, according to Freddie Mac. That translates into mortgage payments rising by hundreds of dollars more every month. Median monthly mortgage payments are now about 81% higher than they were a year ago, according to a Realtor.com® analysis.

Few buyers, especially first-timers, can afford that sort of increase. Many can no longer qualify for mortgages due to the higher rates, and others are being forced to slash their budgets. Homes are sitting on the market longer, sellers are slashing prices, and sales are stalling. So the pressure is on home prices to come down. And they’re beginning to oblige.

“The housing market is getting crushed,” says Mark Zandi, chief economist at Moody’s Analytics. “Potential first-time homebuyers can’t afford to buy, potential trade-up buyers can’t afford to move. Investors have gone to the sidelines because they know prices are going to fall further.”

How low will home prices go?

Many prospective buyers are eyeing home prices like a game of limbo. How low will they go?

Zandi, from Moody’s Analytics, expects prices will fall nationally by about 10% from peak to trough, bottoming out in the summer of next year. They’ll go down even more in the pandemic hot spots—such as Phoenix; Boise, ID; and Austin, TX—that experienced the biggest run-ups. Prices in these places could drop as much as 20%. Florida, where the demand from buyers is still strong, could hold up a bit better, he says.

“The markets that got most juiced up during the [COVID-19] pandemic are the markets that are going to experience the biggest declines going forward,” says Zandi.

Wolf, of Zonda, expects prices could fall by 15% nationally over the next year. She’s seeing about 40% of builders cutting prices.

However, it’s important to put any price declines into perspective. Nationally, home list prices rose 40.6% in just over two years’ time—from March 2020, when the pandemic lockdowns began, to the peak of the market this past June, according to Realtor.com data. So a 10%, 15%, or even 20% drop over a two-year span isn’t as significant as it might seem at first.