If you’ve been following the news about home sellers cutting prices, it's a classic case of headlines being more alarming than informative. Here's the real scoop on home prices.

The main takeaway is that home prices are higher now than they were a year ago and are expected to keep climbing, though at a slower rate.

A recent article from Redfin states,

“Price Drops Hit Highest Level in 18 Months As High Rates Dampen Buyer Demand.” This might make you think prices are falling.

It's true that Realtor.com’s latest report shows 16.6% of homes on the market had price reductions in May, up from 12.7% last May, but this doesn’t mean overall home prices are declining.

The key is understanding the difference between the asking price and the sold price.

Understanding Asking Price vs. Sold Price

The asking price, or listing price, is what a seller hopes to get when they list their home. Sellers can’t just pick any price and expect top dollar. Today’s buyers are well-informed, and with their budgets impacted by higher mortgage rates, they’re less likely to pay a premium. This is why sellers need to adjust their prices.

If a home isn’t attracting much interest, sellers may lower the price to spark renewed interest. Sometimes, this is because the home was overpriced to begin with. When you see headlines about “price drops,” it can give the impression that home prices are falling.

Mike Simonsen, CEO and Founder of Altos Research, explains:

“Not only is the share of homes with price cuts elevated compared to one year ago, but more price cuts are happening each week than last year.” In contrast, the final sold price is the actual amount a buyer pays when the deal is closed.

The Real Deal on Home Prices

The most important point to note is that actual sold prices are still rising, and they’re expected to continue increasing over the next five years.

What Does This Mean for Home Prices?

While there has been an increase in price reductions recently, it doesn’t mean overall home values are declining. It indicates a moderation in demand. Consequently, sellers are adjusting their expectations to match today’s market conditions.

Despite more price reductions, home values continue to grow annually. According to the Federal Housing Finance Agency (FHFA), home prices rose 6.6% over the past year.

This map shows prices increased almost everywhere in the country, signaling that the market is not in decline.

So, even though price reductions can suggest future price moderation, they’re not a cause for alarm. Redfin’s article also notes:

“. . .those metrics suggest sale-price growth could soften in the coming months as persistently high mortgage rates turn off homebuyers. For now, the median-home sale price is up 4.3% year over year to another record high. . .” With inventory as tight as it is today, price moderation is more likely in the coming months than price declines.

Why This Is Good News for Buyers and Sellers

For buyers, more realistic asking prices mean a better chance of securing a home at a fair price. You can enter the market with more confidence, knowing prices are stabilizing rather than skyrocketing.

For sellers, adjusting your asking price can lead to faster sales and fewer negotiations. Setting a realistic price from the start attracts more serious buyers and leads to smoother transactions.

Bottom Line

The rise in price reductions isn’t cause for concern. It reflects a market adapting to new conditions. Home prices are still growing, just at a more moderate pace.