Goldman Sachs Chief Economist Jan Hatzius asserted that further housing pressure is likely, writing in a new note ominously titled: “Housing Downturn: Further to Fall.” Here are Hatzius' two predictions on the housing market for 2023.
Forecast on Home Sales:
“The sustained reduction in affordability, waning pandemic tailwind, and recent decline in purchasing intentions suggest that home sales are likely to fall further on the net: we forecast existing home sales of 4¼ million in Q4 (seasonally adjusted annualized rate; -12% vs. July) and new home sales of ½ million (flat). This lowers our residential fixed investment growth forecast to -15% in 2022 and 0% in 2023 (both Q4/Q4), vs. -13% and +1½% previously.”
Forecast on Home prices:
“Our model suggests that home price growth will slow sharply in the next couple quarters (+8½% quarter over quarter annualized rate (AR) in Q3, +3% quarter over quarter AR in Q4, corresponding to +14% Q4/Q4 in 2022), as the imbalance between supply and demand continues to shrink, mostly through lower demand. Thereafter, we expect home price growth to stall completely, averaging 0% in 2023. While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”
Is the Housing Decline Possible Next Year?
A housing bubble typically starts with a rise in home demand during a period of low inventory, which can lead to an increase in house prices. Because of the prior surge in demand, a bubble may form when demand declines or remains unchanged while supply grows. When there aren't enough buyers available to purchase the fresh inventory of homes, property values may drop sharply as a result.
According to the Fannie Mae Home Purchase Sentiment Index, consumer confidence in the housing market declined in July to its lowest level since 2011. However, it is still unclear whether the U.S. housing market will implode.
“Surveyed consumers continue to express pessimism about homebuying conditions, with only 17 percent of respondents reporting it's a good time to buy a home,” it said in a release. “Meanwhile, the percentage of consumers believing it's a good time to sell has begun ticking downward in recent months, falling from 76 percent in May to 67 percent in July.”
Fortune magazine contacted Moody's Analytics to request access to its most recent in-depth housing analysis to better comprehend the current housing affordability crisis. Between the fourth quarters of 2022 and 2024, researchers at the financial intelligence organization analyzed how property prices are projected to change in 414 regional housing markets.
The Moody's Analytics forecast model forecasts that among the 414 largest housing markets in the US, 210 markets are likely to experience a decrease in home values over the next two years, while 204 markets are likely to experience an increase.
Over what local income would indicate would be affordable, property prices have increased significantly in certain markets, according to Hepp. “Therefore, as the more new building becomes available, the market for homes may be pulled back due to rising rates and the sense of overvaluation, which could result in price reductions.
In addition, there has been a lot of immigration into these areas from other states, primarily the Northeast, and Baby Boomers who are retiring. These new purchasers might now consider moving to other areas where they believe the cost of living is less expensive, which would reduce demand and possibly cause builders to lower their prices.
According to the research firm, 183 of the 413 biggest regional housing markets in the United States are “overvalued” by more than 25%. Boise, Idaho, which is overvalued by 71.7 percent, and Flagstaff, Arizona, which is overvalued by 60.6 percent, are two examples of these noticeably expensive markets.
While being overvalued doesn't necessarily indicate that a market's home prices will fall, significantly overvalued markets historically have a higher risk of seeing price declines, which Moody's Analytics chief economist Mark Zandi said was the case now, Fortune reported. The company expects home prices in those 183 markets to fall by 10 to 15 percent. If the U.S. enters a recession, Moody's Analytics predicts that those markets will see steeper declines of 15 to 20 percent, according to Fortune.
The prospect of a big drop in house prices is becoming more and more likely as home sellers give in to the mounting pressure on affordability posed by June’s rapid mortgage rate hike. Nationwide, home prices increased 18.3% year over year in June 2022, compared with June 2021, marking the 125th consecutive month of year-over-year increases, according to CoreLogic, a data analytics provider.
Though annual appreciation was still strong, it slowed from the previous month for the second consecutive month, reflecting reduced buyer demand in part due to higher mortgage rates and worries about a slowing economy. Lawrence Yun, the chief economist at the National Association of Realtors, points out that the housing markets that have experienced price gains may find themselves at a pivotal moment.
“What I can say is that those markets that boomed were driven by strong local job creations and from new residents moving into those regions, including as retirees,” he said. “So, for places like Phoenix, Tampa, and Boise, you may or may not see any meaningful price decline. They may also be poised for further price increases.”