While housing markets saw price increases, some areas saw a decrease in prices from the month before, signaling sellers may be lowering asking prices on properties that won’t sell despite low inventory.

Home prices continued to climb in the first month of 2024 after last year’s record-breaking increases, but a closer look at several of the biggest housing markets show that prices have dropped in the last month.

The S&P CoreLogic Case-Shiller Index, which measures home prices nationally, rose 6% from a year earlier in January, up 0.4% from the month before. The 10- and 20-city indices saw 0.2% and 0.1% increases, respectively, according to Tuesday’s report.

The continuing rise in home prices comes as no surprise to Americans, as 2023 ended with record-breaking numbers. But 17 out of 20 metro markets saw home prices decrease, a sign the market may be starting to cool. The drop in home prices might be a result of sellers reducing their asking price on overpriced homes and struggling to attract buyers despite otherwise low inventory.

“Home prices are softening,” said Troy Ludtka, an economist at SMBC Nikko Securities America, optimistic for a year of continued shelter disinflation.

Mortgage rates above 6.0% continue to discourage people from selling their homes, an overwhelming factor in keeping inventory low. But high rates are also discouraging buyers, putting downward pressure on prices.

“On a monthly basis, home prices continue to struggle in the face of elevated borrowing costs,” said Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices.

In low-inventory areas, like Southern California, where demand remains high, a shortage in housing is causing an affordability crisis. State and local governments in many parts of the country are easing zoning restrictions or incentivising rehabbing existing homes to help increase inventory to meet the demands of the market.

In San Diego, Ca., accessory dwelling units, called ADU’s, are springing up across the city thanks to sweeping state rezoning laws enacted in 2016 aimed at finding creative ways to add housing to existing properties to help alleviate the housing crisis.

“That’s one of the reasons our state has implemented and facilitated the process for homeowners to build ADUs,” Will Flores, realtor and host of Mortgage Heroes, said.

But savvy investors – big and small – are buying homes in Southern California in hopes of cashing in on the ADU craze. ADUs have yet to be the relief valve the region’s market desperately needs.

San Diego, the market that saw the highest increase, rose by 11.2%. Home prices there
continue to increase as investors and families compete for homes in the tight market. In Los Angeles home prices grew 8.6%.

Elsewhere, home prices cooled a bit and in cities in the Midwest, like Cleveland and Detroit, prices are up for the year but down from the month before. Median home prices in Detroit hover just above 80k, according to Redfin.

Modest price decreases are mostly token concessions between buyers and sellers. Home prices are still too high for average Americans. But that hasn’t stopped a relatively small group from buying homes.

Peter Morici, an economist at the University of Maryland, said rising home prices, particularly in big cities, create a buyer’s market for one group: high earners.

“We’re going back to prewar times,” he said, “homeownership is a luxury of the professional class.” Contributing to the affordability crisis – and possibly leading to small dips in asking price – is a pivoting away from remote work and a return to cities. This return to large cities is also causing a ripple effect on area suburbs.

He added that sellers who bought large houses outside of cities are doing whatever they can to sell those homes, even if it means lowering prices.

Portland continues to lag behind all other markets, struggling to see prices rise less than 1% for the year.

And despite recording its warmest winter on record, Minneapolis continues to see a price decline, shrinking 2.4% over the last three months.

Fluctuations in inventory will be important to watch as the Fed gears up for rate cuts. A rate cut might entice more sellers into the market, hoping not to have their next mortgage’s carrying costs eat into their profits. Supply remains very low, and the economy’s soft landing remains attainable.

An increase in inventory is the most desirable outcome for Americans looking to become homeowners at price points they can afford. Any other scenario that yields a substantive dip in home prices would mean the country would likely be heading towards a recession.

Ludtka warned that home prices and mortgage rates won’t fall together. If they do, workers will be worried about keeping their jobs and not buying houses. Instead of relying on wishful thinking, he would like to see a shift in policy serve as a fulcrum to getting more Americans to become homeowners.

“It’s on the government, federal, state and local, to effectively build the units that are demanded by the marketplace,” he said.