It finally happened — as per a recent report, it appears home prices are actually beginning to fall — for the first time since 2012. Indeed, home valuations dropped 0.1% in July compared to the month prior, according to Zillow’s Home Value Index. As such, rumors of a potential housing market recession have never been louder. Are housing prices at risk of crashing?

According to Zillow Chief Economist Skylar Olsen, last month’s dip is more a blip on the map rather than evidence of a downturn.

Home values flattening so quickly after recent record growth might surprise, but it’s a badly needed rebalancing that gives home buyers more options, more time to shop and more negotiating power. This slowdown is about discouraged buyers pulling back after the affordability shock from higher rates. As prices soften, many will renew their interest, and we will continue our progress back to ‘normal.’

The point isn’t without merit. The 0.1% pullback only translates to an average $366 price drop for U.S. homes. Given the rapid rise in mortgage rates this year and the proceeding drop in home sales, down more than 12% last month, a slight dip in prices seems a relatively organic market response.

Despite home prices falling month over month, they’re still up 16% from the same month last year, and 44.5% higher than the pre-pandemic equivalent.

With that said, fears of a more brutal housing market downturn aren’t completely without warrant. In the July Federal Open Market Committee minutes, officials specifically predicted a further “slowdown in housing activity.”

Housing prices have skyrocketed the past few years as the pandemic forced Americans inside. Are home prices liable to tumble?

Housing Market Recession Looms Large

According to credit rating agency Fitch, a “severe downturn” is now in the cards. Fitch projects that U.S. home prices could slide by as much as 15% over the next few years alongside a potential 30% drop in housing activity.

The National Association of Home Builders/Wells Fargo Housing Market Index lost 6 points in August, dipping under its “break even” marker of 50 for the first time since the pandemic started. This represents the eighth consecutive monthly decline for the index.

NAHB Chief Economist Robert Dietz believes the Fed’s drastic tightening efforts have already plunged the housing market into a recession. “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” he said earlier this month.

With that said, home construction in the U.S. is still a murky business. Land, labor and material costs are all up, putting an undue burden on the already stretched industry. Home building has remained constrained since the start of the pandemic, and in many ways, has still yet to recover. As long as the supply of housing remains pinched, it’s unlikely for home prices to undergo a severe drop.

“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months,” Dietz added.

Home Prices Remain a Question Mark Going Forward

Uncertainty in the markets and uncertainty in the economy means uncertainty for housing. As analysts continue to question the state of U.S. households, it will be difficult to see where housing is going until we get there.

30-year fixed rate mortgages are trending at more than twice their pandemic lows and may be subject to further increases as the Fed continues its hawkish agenda. Just this morning, Fed Chair Jerome Powell warned of “some pain” to the U.S. economy as the central bank eyes further interest rate hikes. Housing may well be an unfortunate casualty of a transitioning U.S. economic environment.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.