Are buyers and sellers adapting to the new normal? 

Buyers and sellers have had a few months to digest the realities of higher interest rates, fewer offers and more days on market — but that doesn't mean they're ready to accept the housing market's new normal.

An early look at the October data shows the typical U.S. home value was nearly flat from September to October, which suggests buyers and sellers could be settling into a new market equilibrium, said Zillow home trends expert Amanda Pendleton.

"Buyers and sellers will shift their expectations when they have to," Pendleton said in an email, noting that in June, buyers were forced to the sidelines as higher interest rates, on top of already high home prices, cut into their budget. Sellers were somewhat insulated by low inventory, which kept home prices high, but the pullback in demand has caused sellers to reconsider their list prices this fall.

Some expectations not yet aligned with reality

Sudden shifts can leave buyers and sellers confused or in a state of wishful thinking, as evidenced by a recent Zillow survey asking agents about consumer misconceptions. The top misconception for buyers? That home prices will come crashing down. Though price growth has slowed or declined in some areas, prices are still higher year-over-year across most of the U.S.

Sellers, on the other hand, appear to be holding onto the past. Their top misconception was that the bidding wars and quick sales of 2021 and early 2022 would continue.

The second biggest misconception for buyers, according to agents surveyed, was that they should wait for mortgage rates to come down.

A rapid drop in home values and mortgage rates is unlikely, according to Zillow research. Zillow's home value forecast predicts a flattening of values over the next year, with prices increasing 1.3% by September 2023. Fewer new listings will keep upward pressure on prices. Meanwhile, some housing economists believe mortgage rates are more likely to rise than to fall as inflation pressures remain strong.

Even if rates dropped significantly, buyers who chose to wait out the market would be back, driving up competition and prices, said Michael Perry, an agent who leads The Perry Group in Salt Lake City, Utah.

"If the buyer can purchase today, they have bargaining power, more options and more time to find the right home, instead of being rushed into a purchase they might regret," Perry said in Zillow's report.

Realistic listing prices becoming more important

Less than a year ago, the environment so strongly favored sellers that in many markets the original listing price seemed like a starting point, with the expectation that multiple buyers would drive it up further. 

That's no longer the case, and listing a home too high can negatively impact the time it takes a house to sell. 

"The best pricing strategy ultimately depends on the market and the seller's goals — whether they're looking for a fast sale or top dollar for their home," Pendleton said. "That said, a listing priced too high runs the risk of lingering on the market and becoming stale."

Agents appear to be divided on the optimal pricing strategy. Zillow's survey found about half of the agents believe listing at market value is the best strategy, while about a third think it should be listed slightly above market value. Just 18% of agents think it's better to list a house slightly below market value.

Despite the current challenges for buyers and sellers, Pendleton said "these changes in the market are ultimately leading us to a healthier, more balanced housing market, which is a good thing." The goal, she said, is "to get to a place where there's a level playing field for both buyers and sellers — and while that is still a ways off with the current state of housing affordability challenges, we are on the right path."