The answer to this question is quite simple. They fall when they stop rising. The answer is not intended to be facetious. This is quite literally what happens. Saying it that way sounds a bit juvenile. Seeing the words as a picture is something very instructive. The below graph from the Federal Reserve illustrates the point quite clearly using the Las Vegas market as an example.
The zero line of the graph represents the point at which home prices are not changing as a percentage over time. Even though prices did rise for another two years into the Las Vegas housing peak of Aug 2006, the percent change from 2004 decreased until it convincingly crossed the zero line in Sept. of 2006.
This is a great visualization of the mechanics of the market. It really drives home the idea of “prices fall when they stop rising” and gives the investor a way of seeing when a trend is likely over with the potential to reverse. It works in the opposite direction as well. Prices start going up when they stop falling. Once again the graph is quite helpful in anticipating this trend change.
Las Vegas home prices bottomed in Feb. of 2012. You can see from the graph that March 2012 is when prices convincingly cross the zero line to the upside starting the meteoric rise in Las Vegas home prices that we have witnessed over the last two years.
So where are we now? There have been many articles of late talking about the “slowing” of the real estate market. From the graph you can see it is all happening again like it did before. The rising percent change in housing prices ended Aug. of 2013. In Feb of 2014 the change in home prices met the zero line of the chart once again. So how do we know if prices are going to fall like in 2006 or explode up like January of 2003?
To answer this question there is only one tool necessary, Elliott Wave Principle. The proper application of wave principle shows this analyst that the odds are very much in favor of another plunge well below the zero line of the chart. In fact, I would expect the move down to come below the lowest point on the chart which occurred at the beginning of 2008. From there, the fall in prices would not stop but begin slowing until the zero line was meet once again.
To see the above chart dates and points in greater detail you can visit the FRED interactive website. Make sure you change the chart to percent change rather than index scale.