Most economists agree: Housing prices are expected to fall, nearing a bottom sometime between 2024 and 2025 before rebounding. That’s the opinion of analysts at Goldman Sachs, Wells Fargo, Moody’s Analytics, Capital Economics, The National Association of Home Builders, KPMG, and Fitch Ratings. But some economists, including National Association of Realtors Chief Economist Lawrence Yun, believe decelerated growth is more likely, and that national aggregate housing prices may even rise by 1% in 2023. Yun also expects price growth to rebound in 2024, with a 5% increase in the median home price across the United States. Is it possible that most predictions missed the mark and Yun’s is accurate?
Support for Yun’s Claim
Inventory is still down from 2019
While the number of active listings has increased throughout 2022, it was still down about 38% in October relative to three years prior. Zillow data also shows that new listings are down almost 24% from last year, as homeowners with low-interest fixed mortgages have little incentive to sell.
Furthermore, the construction industry is facing headwinds. Construction firms are being cautious about new housing starts due to fears of declining demand as mortgage rates climb. Ongoing supply chain issues mean higher construction costs that further impact affordability. New housing starts are down both month-over-month and year-over-year. Builder confidence continues to fall. All of that will contribute to constrained inventory. Meanwhile, a large share of millennial homebuyers is driving demand.
But remember, the housing market shift is still in its infancy. Most economists don’t expect prices to hit their bottom until 2024 or 2025. The Fed raised the federal funds rate quickly, we have yet to see the full impact of those decisions, but most signs point to an improved balance between supply and demand in the housing market. The median number of days a house remains on the market is increasing. Mortgage purchase applications are down 42% year-over-year — the demand for mortgages hasn’t dropped this low since 1997. And July marked the most rapid home price deceleration in the history of the S&P Case-Shiller Index.
Rate hikes are slowing
One of Yun’s conditions for his predicted aggregate increase in home prices over 2023 is for mortgage rates to stay around 7% or come down. Federal Reserve Vice Chair Lael Brainard has signaled the central bank will start decreasing the pace of its rate hikes to react to a slowing annual inflation rate. But Fed Governor Christopher Waller said they have a ways to go to hit their target. Mortgage rates have already receded from their recent highs but are still in the 6%-7% range, keeping Yun’s forecast in line.
Unemployment is still low
Housing prices tend to go up except during periods of rising unemployment. The Great Recession was an exception, but current conditions aren’t mirroring that downturn. Lisa Shalett, Chief Investment Officer at Morgan Stanley, notes that an inflation-driven recession will be less severe than the credit-driven recession of 2007-2008. That’s in part because of the high demand for houses and cars amid low supply, along with a record-high ratio of job openings to job seekers. Furthermore, many Americans built savings and equity during the pandemic that are providing a cushion. That means there’s a chance families can weather rising unemployment and stay in their homes. If that’s how this recession plays out, Yun’s prediction could come to pass.
Why Housing Prices Are Still Likely to Fall
Most expect prices to fall
Most economists surveyed by Zillow think the market will shift into the hands of the buyer, even if they don’t foresee falling prices across the board. If buyers find themselves fighting less competition, demand might remain elevated to some degree. But the average American’s sentiment isn’t aligned with Yun’s optimism.
Only 16% of Americans believe it’s a good time to buy, the lowest reported percentage in the 11-year history of the Fannie Mae Home Purchase Sentiment Index. Research suggests that when people expect prices to fall, they’re less likely to buy and more likely to wait until the market presents better deals. Their expectations, therefore, mitigate the demand for homes. Those who need to relocate are also less likely to pay current market values and more likely to try lowball offers.
It’s also true that if people expect steep declines, they’re more likely to sell while prices remain elevated, which increases the supply of homes. But since most economists don’t predict a crash, with prices falling below pre-pandemic values and most homeowners have locked in low-interest rates, an increase in selling behavior is less likely.
Some, but not all, signs point to an upcoming recession
Surveys from the Wall Street Journal, Bankrate, and The National Association of Business Economics all show that most economists predict a recession in 2023 or 2024. The National Bureau of Economic Research (NBER) measures several factors to determine if an economic slowdown qualifies as a recession. There’s no specific rule about what conditions or thresholds need to be met, but the bureau generally looks for the following:
- Declining real personal income: Real average earnings declined 1.9% year-over-year as of November.
- Rising unemployment: The unemployment rate remained stable but rose slightly in October. In November, it remained at 3.7%. If it continues to rise, we’re more likely to see a greater supply of homes and falling prices.
- A decrease in consumption and retail sales: Personal consumption expenditures are still increasing, while retail sales remained flat in October, following a month-over-month and year-over-year increase in September. Some speculate that wealthier white-collar workers who socked away savings during the pandemic are fueling the economy while low-income Americans struggle to meet their basic needs.
- A slump in productivity: Labor productivity saw a record-breaking decline in the first two quarters of 2022, which experts say signals higher unemployment and inflation since the data suggest higher compensation must come from higher prices.
- Prolonged negative GDP growth: Gross domestic product, along with real disposable personal income, increased in the third quarter after declining the previous two quarters. An increase in spending on services offset a decrease in goods, and exports exceeded imports, but experts say the growth isn’t sustainable.
The Unpredictable Factors Influencing the Housing Market
|Factors that could raise housing prices||Factors that could cause housing prices to fall|
|– A decrease in mortgage rates
– Decreasing inflation/increasing real personal income
– Sustained job availability
|– An increase in mortgage rates
– Expectations of lower prices in the future and recession fears
– Rising unemployment
Yun’s estimate could be accurate if we manage to avoid a recession and rising unemployment. But the fear of a recession alone could be enough to cause housing prices to fall. Most economists, along with most Americans, believe a recession is on its way. With so many undetermined factors, it’s impossible to say with certainty what will happen to home prices on a national level. Investors will be best-served honing in on an individual market, where tracking trends may allow for more accurate estimates.
It’s important to note that even Yun expects some markets to see price declines. While he predicts a 1% increase in prices nationally, he notes that prices in California are already starting to come down. The markets that have experienced the most rapid price appreciation over the past two years are most likely to return to equilibrium. The CoreLogic forecast for 2023 is consistent with Yun’s claim and notes that overvalued home prices in the West and Northeast may be encouraging migration to more affordable Southeastern states, which are outpacing the rest of the nation with price gains.
The good news is most experts aren’t expecting housing prices to crash like they did during the Great Recession. Subprime mortgages aren’t threatening financial stability this time around. But a housing correction of up to 15% is still a strong possibility. For Yun’s prediction to hold true, several unpredictable factors need to fall in favor of a stable economy.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.