The number of professionals thinks home values will continue to decline, perhaps reaching a trough between 2024 and 2025, before rising. This is the point made by experts working for Goldman Sachs, Wells Fargo, Moody’s Analytics, Capital Economics, The National Association of Home Builders, KPMG, and Fitch Ratings, among other companies. However, the senior economist for the National Association of Realtors, Lawrence Yun, is one of the experts who predicts that slowed growth is more likely, and that nationwide average home prices may even climb by one percent in 2023. In addition, Yun anticipates that price growth will pick up again in 2024, with a 5% rise in the median house price throughout the United States. Is it feasible that everyone else was off the mark and Yun was on the wealth?
As of 2019, inventory is still declining
Although there has been an increase in new listings throughout 2022, in October of that year, there were 38% fewer listings than in October of the previous three months. According to the statistics provided by Zillow, the number of new listings has decreased by approximately 24 percent compared to last year. This is likely because homeowners who have low-interest fixed mortgages have little motivation to sell.
Additionally, the construction sector is challenged with difficulties. As a result of rising mortgage rates, construction companies are exercising extreme caution regarding the commencement of any new house projects. Ongoing problems with the supply chain result in increased building costs, which in turn have an additional negative effect on affordability. The number of new homes being built has decreased from the previous month and the same time last year. Developer trust continues to deteriorate. All of these factors will work together to make inventory more difficult. Meanwhile, a large percentage of millennials are entering the housing market, which is driving demand.
But keep in mind that the change in the property market is still in its infancy. Most analysts believe prices will not reach their troughs until 2024 or 2025. The Federal Reserve quickly increased the federal funds rate; the full effects of this action have not yet been seen; nevertheless, recent trends suggest that the housing market’s supply-and-demand imbalance has started to improve. The number of days a home spends on the marketplace in the median length of time is growing. The number of people applying to buy a home with a mortgage has decreased by 42 percent year-over-year; the demand for mortgages has not been this low since 1997. In addition, July was the month in which the S&P Case-Shiller Index recorded the quickest monthly decline in house prices throughout its history.
Rate hikes are slowing
According to Yun, mortgage rates need to be approximately 7% or go lower for house values to rise by that much on average over the next several years, as he has forecast they would. In reaction to a decline in the yearly inflation rate, the Vice Chair of the Federal Reserve, Lael Brainard, has indicated that the central bank would begin lowering the pace at which it raises interest rates. However, the Governor of the Federal Reserve System, Christopher Waller, said they still have a ways to go before reaching their goal. Mortgage rates may continue to rise before the Fed stops intervening, making Yun’s forecast less likely to come true.
Still a low rate of unemployment
Unless the unemployment rate is growing, housing values tend to rise. The Economic Crisis was an exception, and the present business situation is not analogous to that economic slump. According to Lisa Shalett, Chief Investment Officer at Morgan Stanley, a recession driven by inflation would be less severe than the credit-driven downturn between 2007 and 2008. This is due, in part, to the strong demand for homes and cars in contrast to the limited supply, as well as the record-high ratio of job opportunities to those looking for work. In addition, many people in the United States were able to build up their savings and equity throughout the epidemic, which serves as a buffer. This indicates that families can weather the growing unemployment rate and continue living in their houses. Yun’s forecast could be true if the current economic downturn continues this way.
The Reasons Why Home Prices Will Probably Continue to Fall
Most analysts anticipate a price decline
While most analysts Zillow questioned don’t expect prices to drop across the board, they believe the market will eventually move to the purchaser’s benefit. If prospective purchasers discover that they are up against less competition, demand can continue to be raised to some degree. However, most Americans don’t appreciate Yun’s confidence.
The Fannie Mae Home Purchase Sentiment Index has been conducted for eleven years. Throughout that period, it has been found that the proportion of Americans who feel it is a good time to purchase real estate has always been higher than the current 16%. According to research, when individuals expect prices to go down, they are less inclined to spend money and more likely to wait until the marketplace provides better deals before making a purchase decision. Because of this, their anticipations weaken the market for residential real estate. Those forced to move are also less inclined to pay the going rates for a home and are more likely to make offers below the asking price.
It is also true that if individuals anticipate substantial reductions in the housing market, they are more inclined to sell their houses while prices are still high, which results in an increased supply of properties on the market. However, most analysts do not anticipate a collapse, prices are below where they were before the epidemic, and most homeowners have already locked in historically low mortgage rates. Hence, a rise in the number of people selling their homes is less expected.
Certain indications predict a recession, but not all of them.
According to surveys by The Wall Street Journal, Bankrate, and The National Association of Business Economics, the vast majority of economists anticipate the economy will enter a recession in either 2023 or 2024. In order to evaluate whether or not an economic downturn constitutes a recession, the National Bureau of Economic Research (NBER) looks at many different indicators. No one regulation specifies what requirements or criteria must be reached, but in general, the bureau checks for the following:
- Declining real personal income: Since October of last year, real average earnings have seen a 2.3% year-over-year decrease.
- Rising unemployment: The unemployment rate has remained relatively unchanged but increased somewhat over the previous month (October). If it continues to rise, there is a higher likelihood of a greater supply of houses, which would result in lower prices.
- A decrease in consumption and retail sales: Although private consumption expenses continue to rise, retail sales did not change from the previous month in October, despite September’s month-over-month and year-over-year increases. Some people believe that higher-income white-collar employees who could put money aside during the epidemic are driving the economy forward, while low-income Americans are having a difficult time meeting their basic criteria.
- A slump in productivity: The first two quarters of 2022 saw a worker productivity decrease that broke all previous records. According to industry analysts, this is a caution indication that more inflation and unemployment are on the way since the facts imply that better compensation must come from higher prices.
- Prolonged negative GDP growth: Following two consecutive quarterly declines, GDP and real disposable personal income rose in the third quarter. An increase in expenditure on services was enough to balance a fall in spending on goods, and exports were higher than imports; nonetheless, analysts believe that the expansion cannot be maintained.
The Housing Market and Its Unpredictable Factors
Housing price-increasing factors
- A decrease in the interest rates on mortgages
- minimizing inflation while also raising real personal income
- Sustained job availability
The potential causes of falling home prices
- A rise in the interest rates on mortgages
- Price reduction forecasts for the future and concerns about economic contraction
- High unemployment
Yun’s prediction might be right if we successfully prevent an economic downturn and growing unemployment. However, the simple anticipation of an economic downturn could be enough to bring about a decline in property values. Most economists and the vast majority of Americans believe that a recession is approaching. It is hard to predict with absolute precision what will happen to property values nationally since there are so many components whose outcomes are not yet known. It is in investors’ best interests to concentrate on a certain market, enabling them to observe trends more accurately and make predictions based on those patterns.
It’s crucial to remember that even Yun anticipates price falls in certain areas, so this is no surprise. However, he observes that costs in California are already starting to fall, although he forecasts a 1% rise in costs nationwide. The stock markets that have seen the greatest rate of price rise over the last two years are most likely to achieve equilibrium again. CoreLogic’s 2023 estimate is in accordance with Yun’s argument that people are leaving the expensive housing markets of the West and Northeast for the cheaper housing markets of the South, where house prices are growing at the double the national average rate.
The good news is that most economic analysts do not anticipate a precipitous drop in house values like what happened during the Great Recession. This time, the instability of the financial system is not caused by subprime mortgages. However, a drop in the property market of up to 15% is still possible. For Yun’s forecast to come true, a few unexpected events will need to converge to benefit economic stability.