Housing Market Predictions 2023: Will Prices Drop?
Will house prices go down in 2023? Depending on who you ask, the forecast for 2023 is mixed. Most experts in the housing industry predict fewer buyer demand, lower prices, and higher borrowing rates. Rate increases, along with a shortage of availability, have pushed many purchasers to the sidelines. Home prices may fall slightly, but not drastically as they did in 2008. Some believe that the housing market will continue to outperform compared to the pre-pandemic.
Hence, there is no clarity regarding housing forecasts for 2023. CoreLogic, Fannie Mae, Freddie Mac, and Zillow all predict that home prices will grow next year albeit slightly. If inflation persists, the Fed could tighten more than anticipated by the financial markets. This would result in higher mortgage rates, which will impact the U.S. housing market. If inflation falls or a recession develops in the near future, the Fed may soften financial conditions.
While Zillow predicts that home values will rise in most markets over the next 12 months, it does not expect much growth in the remaining months of 2022. It predicts that home values will fall in 552 markets over the next three months. In over two-thirds of the nation's top housing markets, home values declined this summer due to rising mortgage rates. As we speak, the economic shock of rising mortgage rates continues to erode some of this spring's gains.
<<<Also Read: Housing Market Trends in July & August 2022?>>>
Here's when the home prices can drop in 2023. While this may appear to be oversimplified, it is how markets work. Prices drop when demand is met. There is now an excessive demand for houses in several property markets, and there simply aren't enough homes to sell to prospective purchasers. Home construction has increased in recent years, although they are still far behind. Thus, big drops in housing prices would necessitate considerable drops in buyer demand.
Demand falls mostly as a result of higher interest rates or a general weakening of the economy. Rising interest rates would ultimately need far less demand and far more housing supply than we now have. Even if price growth slows this year, a fall in home prices is quite unlikely. As a result, there will be no fall in house values; rather, a pullback, which is natural for any asset class. In the United States, house price growth is forecasted to just “moderate” or slow down in 2022 as well as 2023.
By the end of the year, home price growth is anticipated to moderate to around 5 percent. The S&P CoreLogic Case-Shiller National Home Price Index increased 20,4% from a year earlier in April, down from 20,6% the previous month. The Case-Shiller Index is the three-month moving average of the prices of houses sold (i.e. February to April).
While home prices continued to rise at a quick clip at the beginning of the year, the rise in mortgage rates since March makes it doubtful that this trend will continue for much longer. Some would-be purchasers are being priced out of the market, while others are forced to reduce their spending.
Between the first quarters of 2021 and 2022, all 50 states and the District of Columbia saw an increase in housing prices. In today's housing market of high mortgage rates, buyers are still driving up property prices, leading homes to sell rapidly. During this pandemic, we saw hyperactive buyers make offers without seeing the property and forego contingencies to win bidding wars in the highly competitive housing market. The historically low mortgage rates fueled an increase in demand, particularly among millennials.
However, they are running into a shortage of available housing and now have to face higher rates of close to 6%. Many buyers are still in the hope of finding a home that fits their budget and needs. Despite popular belief that now is not a good time to buy, many home buyers are looking to lock in their monthly housing payments. However, in this hot real estate market, it's difficult for buyers to find a good deal, especially with the typical asking price rising by double digits.
Although the housing market of 2022 is still expected to favor sellers we appear to be at a tipping point in the housing market, where prices have risen so dramatically that buyers are backing off and home sales are slowing down considerably as compared to last year. House prices continue to rise but at a slower pace.
Price growth has moderated slightly, but it remains above historical levels, thanks to a low inventory of available properties for sale. House prices rose nationwide in May, up 1.4 percent from the previous month, according to the latest Federal Housing Finance Agency House Price Index (FHFA HPI®) released on July 26, 2022.
House prices rose 18.3 percent from May 2021 to May 2022. The previously reported 1.6 percent price change for April 2022 was revised downward to 1.5 percent. The FHFA HPI is the nation's only collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
For the nine census divisions, seasonally adjusted monthly house price changes from April 2022 to May 2022 ranged from +0.2 percent in the Pacific division to +2.0 percent in the New England division. The 12-month changes were all positive, ranging from +13.9 percent in the Middle Atlantic division to +23.8 percent in the South Atlantic division.
Home Prices Are Rising in 2022: Quarterly Report (2nd)
U.S. home prices rose 17.7 percent from the second quarter of 2021 to the second quarter of 2022 according to the Federal Housing Finance Agency House Price Index (FHFA HPI®). House prices were up 4.0 percent compared to the first quarter of 2022. FHFA’s seasonally adjusted monthly index for June was up 0.1 percent from May.
“Housing prices grew quickly through most of the second quarter of 2022, but a deceleration has appeared in the June monthly data” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “The pace of growth has subsided recently, which is consistent with other recent housing data.”
Note: The report for the third quarter will be released by the end of November.
Key Housing Prices Trends
- Nationally, the U.S. housing market has experienced positive annual appreciation each quarter since the start of 2012.
- House prices rose in all 50 states and the District of Columbia between the second quarters of 2021 and 2022.
- House prices rose in all of the top 100 largest metropolitan areas over the last four quarters.
- Annual price increases were most significant in North Port-Sarasota-Bradenton, FL, where prices increased by 36.4 percent
- Prices were weakest in WashingtonArlington-Alexandria, DC-VA-MD-WV (MSAD), where they increased by 9.1 percent.
- Of the nine census divisions, the South Atlantic division recorded the strongest four-quarter appreciation.
- It posted a 23.0 percent gain between the second quarters of 2021 and 2022 and a 5.2 percent increase in the second quarter of 2022.
- Annual house price appreciation was weakest in the West North Central division, where prices rose by 13.9 percent between the second quarters of 2021 and 2022.
Home Prices Increasing the Fastest in these States?
- Florida 29.8 percent
- Arizona 25.5 percent
- North Carolina 25.2 percent
- Montana 24.9 percent
- Tennessee 24.3 percent
Where Are Home Prices Increasing the Slowest?
- District of Columbia 5.2 percent
- North Dakota 10.6 percent
- Louisiana 10.8 percent
- Minnesota 11.3 percent
- Maryland 12.0 percent
Will Home Prices Drop in 2023: The Latest Forecast for 2023
Here’s the home price shift coming for the housing market in 2023. Zillow’s outlook for home prices had been revised down significantly due to a sharp downturn in July. Zillow’s home value forecast expected a significant slowdown in annual home value growth from the current rate of 16% to 2.4% for the twelve months ending July 2023.
This week Zillow revised its 12-month outlook and now predicts that U.S. home values will climb 1.4%. That’s down from the 2.4% it forecasted a month earlier, and down from the 7.8%, it forecasted back in July. And while Zillow anticipates a slowing of national home price growth to 1.4%, it will vary significantly by the regional markets.
A weaker outlook for home sales also factors heavily into the lower forecast for home value appreciation. Their housing market forecast for 2023 now incorporates the share of for-sale listings that receive a price cut into its calculation. That's well above the 4.6% average annual appreciation posted since 1987.
As of July, inventory remains 54% below the 1.4 million active listings we had in July 2019. As long as inventory remains scarce, it's unlikely that existing home prices will fall nationally in 2023. This is the fourth month in a row that Zillow has issued a negative correction. The regional housing forecast for 2023 is going to vary a lot.
Metros Where House Prices Will Drop Most by August 2023
Some regional markets are projected to see home price declines. In July, Zillow economists predicted that only five regional housing markets would see declining home values in the coming year. The number was later revised to 123 regional markets by Zillow economists in August. They now predict that home values will fall in 259 of the nation's 896 regional housing markets between August 2022 and August 2023. Fairbanks tops the list with the highest anticipated decline of 7%.
Metros Where House Prices Will Increase Most by August 2023
Zillow still predicts that the vast majority of regional housing markets will see rising home values in 2023. Among the 896 regional housing markets that Zillow economists analyzed, 615 are predicted to see rising house prices between Aug 2022 and Aug 2023. Another 22 markets are predicted to remain flat.
Among the regions that are anticipated to have losses in value over the coming year are those that have experienced some of the largest increases in property values over the past year. Only one market in Ohio is forecasted to see year-over-year house price growth of 10% or greater, which is Wooster.
According to Moody's Analytics' latest proprietary housing data, as reported by Fortune, home prices will rise 0% next year (2023), a significant decrease from the 19.7 percent price growth experienced by the housing market in the previous year. Analysts predict that price changes will vary significantly across the United States. Moody's predicts that home prices will rise in 183 of the country's 414 largest housing markets in 2023 while falling in 231 others.
According to Moody's analysts, the following five cities will see the greatest year-on-year increases in home prices in 2023:
- Albany, Georgia (4.12 percent)
- New Bern, North Carolina (4.12 percent)
- Augusta, Georgia (3.84 percent)
- Hartford, Connecticut (3.73 percent)
- Casper, Wyoming (3.29 percent)
The company's analysts expect home prices to drop the lowest in these areas in 2023:
- The Villages, Florida (6.96 percent)
- Punta Gorda, Florida (6 percent)
- Reno (5.57 percent)
- Honolulu (5.56 percent)
- Spokane, Washington (5.52 percent)
Researchers at Goldman Sachs published a study on August 30 with the title “The Housing Downturn: Further to Fall.” The investment bank's most recent projections indicate that overall activity in the United States home market will be lower by the end of 2022. The company anticipates significant drops in new home sales (down 22% from last year), existing home sales (down 17% from last year), and housing GDP (down 8.9% from last year). And you shouldn't anticipate any relief in the year 2023. Goldman Sachs forecasts additional drops in housing-related metrics such as new home sales (another 8% drop), existing home sales (another 14% loss), and housing GDP (another 9.2% drop) in 2023.
Top Markets at Risk of Home Price Decline in 2023
Nationwide, home prices grew by 18.3% from June 2021, marking the 125th consecutive month of year-over-year increases. 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. CoreLogic projects that year-over-year appreciation will drop to 4.3% by June 2023, bringing home price growth close to the long-run average from 2010 to 2020.
The CoreLogic Market Risk Indicator (MRI), a monthly update of the overall health of housing markets across the country, predicts that Bremerton-Silverdale, WA is at very high risk (70%-plus probability) of a decline in home prices over the next 12 months. Bellingham, WA; Boise City, ID; Crestview-Fort Walton Beach-Destin, FL and Olympia-Tumwater, WA are also at very high risk for price declines.
Will Housing Demand Exceed Supply, Raising Prices in 2023?
The broader outlook from several housing analysts is that housing demand will continue to surge due to several factors. For e.g; the millennials have aged into their prime homebuying years, and they are now the fastest-growing segment of home buyers. In 2018, millennial homeownership was at a record low but the situation has changed markedly. They are no longer holding back when it comes to homeownership.
According to the National Association of REALTORS’ Home Buyers and Sellers Generational Trends Report, millennials make up the largest share of the homebuying population at 43 percent, the most of any generation – an increase from 37% last year. They are also the most likely generation to use the internet to find the home they ultimately purchase and most likely to use a real estate agent.
The NAR report found that the combined share of younger millennials (23 to 31 years old) and older millennial buyers (32 to 41 years old) rose to 43% in 2021, up from 37% the year prior. Nearly two-thirds of younger millennials, or 65%, located the property they ultimately purchased online, a proportion that steadily declines with older generations. Eighty-seven percent of homebuyers utilized a real estate agent. This percentage was highest among younger millennials (92%) and older millennials (88%).
The study also found that first-time home buying among younger generations is on the rise, with over 4 out of 5 younger millennial home buyers – 81% – purchasing for the first time. Just under half – 48% – of older millennial buyers were first-time buyers. There is a surge of millennial buyers who are maturing into the conventional first-time buyer age bracket. Boomers comprised the highest proportion of house sellers at 42 percent, however, the ratio of millennial sellers has increased from 22 percent to 26 percent over the last year.
Millennials are expected to continue to drive the market and the participation of first-time homebuyers and older millennials are widely forecast to be elevated. Hence, housing prices will not drop. According to the most recent S&P CoreLogic Case-Shiller Index, the cost of purchasing a single-family house increased by more than 20 percent in April compared to the same month last year. In May, mortgage rates climbed substantially, adding to the expense of purchasing a house; however, these large surges may soon level down.
Inflation, excessive housing demand, and inadequate supply continue to drive up prices. Recent revisions by economists at Realtor.com have increased their 2022 median sales price appreciation projection for existing properties to 6.6 percent from 2.9 percent. Many people have been priced out of the housing market by rising rents and rising mortgage rates, which have risen from an average of just 3.2% at the beginning of the year to 5.81% by mid-June.
This has resulted in a decrease in property sales since more individuals are unable to pay the present high costs. There was a 3.4 percent reduction in May from April and an 8.6 percent drop from the same period last year, according to NAR. Theoretically, home prices should continue to fall for the remainder of this year and into 2023.
For starters, rising borrowing prices make credit more unaffordable. Second, as the economy continues to deteriorate, mortgage lenders are expected to approve fewer applicants. Although the housing market appears to be headed in the wrong direction, there are some bright spots. Economic forecasters, despite the recent recession, continue to expect robust demand from purchasers (millennials) and high home price increases in the housing market.
With homebuyers active and supply still lacking, the current trend of home prices will not see a reversal in 2022. In the second half of this year, we will see a gradual shift in the real estate market away from sellers and toward buyers, with a minor rise in the number of properties entering the market. The market is heading to cool off, but house prices will not necessarily fall.
National Association of Realtors (NAR) senior economist and director of forecasting Nadia Evangelou points out that existing home sales have dropped over the last three months while contract signings have slipped in the previous five months. “However, due to seasonality trends, I believe the housing market will continue to outperform compared to pre-pandemic. Keep in mind that June is traditionally the busiest month for the real estate market,” she says.
Despite a sluggish market this summer and waning buyer enthusiasm, we anticipate that home demand will continue to outstrip available inventory. Increasing rental costs should add to this expected development. However, as the number of available homes increases, the demand for housing should decrease owing to affordability concerns.
As a result, we are not on the verge of a housing market crash. The current rate of home price growth is unsustainable, and higher mortgage rates combined with increased inventory will result in slower home price growth but unlikely any price decline (or negative growth).
Sources:
- https://www.zillow.com/research/data/
- https://www.fhfa.gov/AboutUs/reportsplans/Pages/FHFA-Reports.aspx
- https://www.noradarealestate.com/blog/housing-market-predictions/
- https://www.zillow.com/research/zillow-home-value-and-sales-forecast-august-2022-31346/
- https://fortune.com/2022/08/15/falling-home-prices-to-hit-these-housing-markets-in-2023-and-2024/
- https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index/
- https://www.nar.realtor/newsroom/nar-report-shows-share-of-millennial-home-buyers-continues-to-rise
