Forecasting the Housing Market: Potential Home Price Decrease in 2023?
The spring homebuying season has concluded, and while it did not meet the expectations of real estate professionals, it was not a complete disappointment. As we look ahead to the remainder of 2023, housing experts are adjusting their early forecasts to reflect a more realistic outlook. The question on everyone’s mind is when things will return to normal.
Unfortunately, there is no crystal ball to provide definite answers, but industry experts have made predictions for the second half of the year. It was never expected for home sales to maintain the rapid pace seen during the pandemic, with over 5 million homes sold annually. Initial forecasts for 2023 anticipated a decline in sales, ranging between 7% and 16%, compared to the previous year. These forecasts proved accurate, as mortgage rates continue to remain above 6% and potential buyers are deterred by affordability concerns.
Taylor Marr, Redfin’s deputy chief economist, believes the second half of the year will be rather uneventful, with minimal fluctuations in sales. It is expected that home sales will decrease to an annualized pace of approximately 4.2 million to 4.5 million homes, reflecting a 16% decline from 2022.
Amidst this, the only positive aspect in the sales department is the increasing popularity of new construction homes. Due to the limited supply of existing homes, buyers are turning towards new builds. In addition, builders are offering various incentives, such as rate buydowns and price discounts, to make new home purchases more appealing and affordable.
According to the U.S. Census Bureau, sales of new construction homes recorded an impressive increase of over 12% between April and May. Compared to May 2022, sales in May 2023 grew by a significant 20%.
Earlier this year, when mortgage rates dropped to 6.09%, there was optimism that they would continue to decrease or at least maintain levels in the low 6% range. Some experts predicted rates as high as 7.4%, while a few speculated they would fall to around 5.5% by the end of the year. However, inflation’s slow return to the Federal Reserve’s target of 2% has contributed to the persistence of high rates, along with concerns about bank failures, recession, and a stagnant labor market.
It is likely that there will be two additional increases to the federal funds rate this year, further hindering any immediate decrease in mortgage rates.
The growth of home prices has shown a slowdown, but due to insufficient inventory to meet buyer demand, the median home price has remained relatively stable at around $396,000. Danielle Hale, the chief economist at Realtor.com, predicts that nationally, home prices may decrease by less than 1% compared to their peak in 2022.
Regional markets, on the other hand, exhibit considerable variability. Affordable markets in the Northeast and Midwest, such as Boston and Chicago, are expected to maintain stability in prices. However, prices in the West and certain “overheated” cities in the South, like Sacramento and Austin, are likely to experience a decline. Affordability remains a significant challenge, particularly for first-time buyers across all regions.
Factors such as high purchasing costs, limited housing supply, and reduced rental costs are contributing to the slowdown in home sales. This, in turn, is causing prospective buyers to delay their first home purchase and dampening overall demand.
At the beginning of 2023, there were optimistic expectations for a rebound in the housing supply, with forecasts indicating a potential increase of up to 22% in the number of existing homes for sale. However, contrary to these predictions, mortgage rates have remained high, prompting homeowners who refinanced or purchased their homes at a 3% rate to stay put. Currently, the market has a 3-month supply of homes for sale, whereas a “healthy” market typically has a 6-month supply.
Even if new listings start to enter the market, the impact on supply will not be seen until the spring selling season. Consequently, sales are likely to be delayed until then.