A home awaits sale at a reduced asking price in Glendale, California. David McNew | Getty Images

After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest. In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1 percent and less than 50 percent.

"After years of strong price growth and intense competition for homes, buyers are taking advantage of the market's easing pressure by being selective about which homes to offer on and how high to bid," said Taylor Marr, senior economist at Redfin, in a release. "But there are some early signs of a softening market, and the increase in price drops may be another indicator that sellers are going to have trouble getting the prices, and the bidding wars, that they may have just months ago."

Critical shortage remains

There is still a critical shortage of homes for sale, especially on the lower end of the housing market, but supplies did increase annually in August for the first time in more than three years, according to the National Association of Realtors. At the same time, the increase in the median home value is now in the 4 percent range, rather than the 6 to 8 percent range where it has been for the past two years. "While inventory continues to show modest year-over-year gains, it is still far from a healthy level and new home construction is not keeping up to satisfy demand," said Lawrence Yun, chief economist for the Realtors. "Homes continue to fly off the shelves with a majority of properties selling within a month, indicating that more inventory — especially moderately priced, entry-level homes — would propel sales." That may be true on a national level, but in California, where home price gains were in double digits, active listings were 17 percent higher in August compared with August 2017, and sales dropped to the slowest pace in two years, according to the California Association of Realtors. California home prices were still up 5.5 percent annually, but that is down significantly from recent gains, and the median number of days it took to sell a home rose from 18 to 21.

California 'market shift'

"While home prices continued to rise modestly in August, the deceleration in price growth and the surge in housing supply suggest that a market shift is underway," said Leslie Appleton-Young, senior vice president and chief economist at the California Realtors group. "We are seeing active listings increasing and more price reductions in the market, and as such, the question remains, 'How long will it take for the market to close the price expectation gap between buyers and sellers?'" The price gap may close even more quickly if mortgage rates continue their trend higher. The average rate on the popular 30-year fixed mortgage loan is up more than a quarter of a percentage point in the past month and is knocking on the door of 5 percent, a level not seen in nearly a decade.

WATCH: August existing home sales unchanged