Is the housing market on its way to a “soft landing” in housing price correction? A trend looks to be emerging that suggests this is a possible outcome.

Prices over the last 6 months are starting to better align with critical inputs that historically explain housing prices (more on that below). Home prices may still be a bit “inflated”, but one could reasonably claim that as much as half of the price bubble people started seeing in 2022 is already gone, even as prices continue to rise.

So, what evidence is there of this soft landing?

I’m tracking national housing price movement relative to expected prices based on four simple but critical inputs to housing prices: incomes, inventory, mortgage rates, and seasonal demand. For years, housing prices stuck closely to those variables, so that national home prices were strongly aligned with incomes, inventory, and rates. Even through Covid’s meteoric price increases in 2020 and 2021, price changes mirrored changes in inventory and household incomes of owner-occupied housing (which better represents incomes of people who can afford a home).

But in 2022, prices rose much more than income, inventory, or rates would’ve suggested. The chart I’ve included with this post shows that prices became more than 11% higher than modeled expectations. (That number was even higher if you used median income or all households instead of owner-occupied households.) You can see that rise in the red part of the chart.

Recently, however, prices have started to better align with expectations. Price drops in late 2022 helped close the gap between prices and expectation. Since then, the price gap has stabilized at around 6-7% higher than expectations, even as prices have risen from $405,000 in December to $430,000 in April. In effect, those price increases reflected changes in inventory, rates, and seasonal demand in a manner consistent with historical trends.

It may be that this 6-7% gap means there is still some air to be let out of the metaphorical housing price balloon. But even if prices still need some correction, it’s not even the case that prices need to actually fall 6-7% to correct for this price vs expectation mismatch; prices could merely grow a little more slowly than otherwise expected and still reduce or eliminate that gap.

So while prices could still be disrupted by a change in rates, inventory, or incomes, I do think people can be more optimistic that the housing market no longer needs a major correction.