In the past few years, buying a home has become harder for many people, mostly due to rising home prices and high mortgage rates. You might have heard the term “market correction” when people talk about the real estate market. But what exactly is a market correction, and how could it actually be good news for people who want to buy a home?

Let’s break it down.

What Is a Market Correction?

A market correction happens when the prices in a market, like real estate, adjust to reflect what buyers can reasonably afford. In other words, home prices drop or “correct” so they become more realistic and more people can afford to buy a house. A correction usually occurs after prices have been rising quickly and have become too high for most people. It’s a natural part of economic cycles, and it happens in other markets too, like the stock market.

Why Is a Market Correction Needed Right Now?

The gap between income and the income needed to buy a home is a big reason why a correction is likely and even needed. Let’s look at the numbers:

• The median household income right now is about $86,000 per year.
• But the income needed to afford a median-priced home is around $120,000 per year.

This $34,000 gap between what people make and what they need to afford a home is a sign that prices have gone beyond what most buyers can handle. This income gap limits the number of people who can qualify for a mortgage, especially when mortgage rates are high, which they have been recently.

How Did We Get Here?

For many years, home prices increased faster than most people’s incomes. Several factors contributed to this, including:

1. Low mortgage rates: For a while, mortgage rates were very low, which made borrowing money to buy a home cheaper. This drove up demand for homes, which led to higher prices.
2. High demand and low supply: Many people wanted to buy homes, but there weren’t enough available on the market. This caused bidding wars and drove prices up even more.
3. Higher mortgage rates now: Rates went up, making monthly payments higher for buyers, which limited how much people could spend on a home.

When home prices go up faster than wages, buying a home becomes less affordable for average families. This creates a situation where only people with higher incomes, or those who have lots of savings, can afford to buy a house.

How a Market Correction Can Help Homebuyers

If a market correction happens, it could help narrow the gap between income and home prices. Here’s how:

• Lower home prices: When the market corrects, the prices of homes may drop, making them more affordable. For buyers who were priced out, a lower home price could mean the difference between qualifying for a mortgage or not.
• Less competition: During a correction, some buyers may leave the market, creating less competition. This could mean more choices for buyers and fewer bidding wars.
• Better loan options: Lower home prices mean that buyers might be able to qualify for better loan options. With a smaller loan, monthly mortgage payments would be lower, making homeownership possible for more people even if mortgage rates stay high.

Summary

A real estate market correction may sound scary at first, especially for those who already own a home, but it can actually be helpful for people who are trying to buy. It allows prices to align better with what most buyers can afford. With the current gap between median household income and the income needed to buy a home, a correction could bring homeownership back within reach for more people.

If you’re planning to buy a home, a correction could be your chance to find a property at a price that fits your budget.