What’s up everyone
As we enter the last quarter of 2022, the big question is- how bad will the housing market get?
What will happen next year in 2023? We know the housing market has taken a downturn, but what exactly will happen?
Today we’re going to take a look at Lance Lambert’s article in Fortune titled We’re entering the next stage of the housing market downturn—3 things to expect heading forward. In this article, they go through the three elements that’ll shift as we move into the second stage of the housing market DOWNTURN.
So lets dive right in
Back in June, Fed Chair Jerome Powel was clear about the housing market going through a “reset”.
“We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again,” Powell told reporters.
Well, we all know what the Fed reserve is doing to fight inflation- they’ve raised rates consistently causing buyers to be priced out of the market because they simply can’t afford to buy a house with the increased rate and still high prices.
Powell wouldn’t commit back then if the rate increases would push home prices lower.
Fast forward to September, and we no longer need to question if the housing “reset” will affect home prices.
We now see that prices in many markets, if not all, have started to correct. Some markets faster than others.
Lambert writes that As data rolls in for August, we now have clear evidence that the housing market downturn has moved beyond that first stage (i.e. a sharp drop in housing activity) and into the second stage (i.e. falling home prices).
“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices. And so there are a lot of markets across the country where we’re forecasting that home prices are going to fall double-digits,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.
Let’s take a deeper look at the three elements that’ll shift as we move into the second stage of the housing market downturn.
- The home price correction is spreading.
IN this article, they talk about the Burns Home Value Index created by John Burns Real Estate Consulting. The Burns Home Value Index measures home value trends for all homes (new and resale) in 133 markets, allowing them to report on and forecast price appreciation without the noise of shifts in the mix of homes selling, as well as other issues.
Among the 148 regional housing markets tracked by John Burns Real Estate Consulting, 98 housing markets have seen home values fall from their 2022 peaks. Just 50 markets remains at their peak.
In 11 markets, the Burns Home Value Index* has already dropped by more than 5%. That includes a 8.2% drop in San Francisco home values.
While it’s common for median list prices to drop around this time of year, it’s not common for home values or “comps” to fall because of seasonality.
Simply put: The home price correction is sharper—and more widespread—than previously thought.
As I’ve reported in my other videos, John Burns Real estate consulting isn’t the only one who thinks prices will continue to correct in 2023. Last week we talked about Ivy Zelman’s predictions of a 9% decrease into 2023-2024 and Mark Zandi of Moodys analytics has been consistent in his predictions of a 5- 10% price drop in some overvalued markets.
Moody’s has also said that if the recession gets worse, those price drops could double.
And I know a lot of you comment about how this is going to be worse that 2008 but according to the Case-shiller US National Price Index https://fred.stlouisfed.org/series/CSUSHPINSA even Moody’s analytics scenario would still be below the peak-to-trough U.S. home price decline of 27% we saw between 2006 and 2012.
And don’t forget there are still some industry experts who don’t think that the home price correction – which is driven by the higher interest rates causing an affordability crisis in the housing market- will carry over into 2023. Zillow, Corelogic and Redfin are still predicting small price appreciation for many markets next year.
Lets look at the 2nd element that will shift
2. The housing downturn will soon spread beyond housing.
Researchers at Goldman Sachs recently released a paper titled “The Housing Downturn: Further to Fall.”
In this paper, Goldman predicts a 22% decline in new home sales before the year is over, a 17% drop in existing home sales and 8.9% in the overall housing GDP.
Goldman projects these numbers to decline even further in 2023, with a 9.2% decrease in housing GDP next year.
In the lead-up to the Great Recession—which officially started in December 2007—housing GDP fell by 7.4% in 2006 and 21.4% in 2007.
If Goldman Sachs is right, it’ll mean that not only will the housing market feel the squeeze, but so will the whole economy which is not surprising.
After all, the Federal Reserve has upped the Federal Funds rate in an attempt to slow the economy.
Think about it- if buyer demand slows, builders also slow production. This causes less demand for things like refrigerators, lumber, windows, and paint which should, in theory, help fight inflation.
“It [housing] is not the target, but it [housing] is essentially the target,” Bill McBride, author of the economics blog Calculated Risk, told Fortune earlier this summer.
It is worth noting that Goldman Sachs thinks home prices will be flat in 2023.
“While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely,” writes Goldman Sachs researchers.
If Goldman Sachs’ forecast comes to fruition, it’ll mean next year is the bottom of the housing downturn. In 2024, the investment bank expects housing activity to begin to rebound. That’ll also see, according to Goldman Sachs, home price growth climb to 3.5% in 2024 and 3.8% in 2025.
The 3rd element that will cause a shift is that
3. Sellers are calling timeout.
IN the past few months, inventory has increased tremendously, especially in markets like Austin and Boise.
But according to Realtor.com, this has started to slow down.
Active listings on Realtor.com jumped by 106,900 homes in May. That was followed by 102,900 and 128,200 jumps in June and July. However, that slowed in August to just a 31,900 inventory jump. And through the rest of the year, Altos Research predicts inventory will actually fall.
So, why is inventory slowing down-
Sellers are realizing that they wont have the crazy bidding wars others saw in 2021 and the beginning of 2022 so they are choosing not to put their house on the market. They also realize they may have to make repairs since buyers can now negotiate inspection items and they either don’t have the cash to do this or simply don’t want to.
Sellers don’t want to trade in their low interest rate to buy a new house with a much higher rate.
There is simply not enough inventory for sellers to find their new home so they are choosing to stay where they are.
“It’s going to be very very hard to persuade people to let go of those insanely low rates,” Palacios tells Fortune. While many industry insiders believe tight inventory will help to prevent a housing crash, Palacios says it won’t be enough to prevent the home price correction.
Let’s be clear: There’s no consensus when it comes to 2023 housing forecasts. Firms like CoreLogic, Fannie Mae, Freddie Mac, and Zillow are all still forecasting positive home price growth over the coming year. Meanwhile, firms like John Burns Real Estate Consulting, Zonda, Capital Economics, Moody’s Analytics, and Zelman & Associates all predict falling home prices over the coming year.
What’s happening where you live? Comment below and tell us where you are and what you are experiencing. As much as the industry insiders can use data to forecast the future of the housing market, the best information, in my opinion, is you guys telling us what’s going on in your part of the country.
Lets end the video with some of the present data provided by Redfin, posted on Sept 16th.
Home prices fell 1% in August
Home SALES fell 2% in August
Time on Market Rose to 26 days in August
A record share of homes had a price drop in August
And the average sale to list price ratio fell BELOW 100% in August
All of this says to me and I’m sure you that the housing market is continuing to correct. The big question is – how much will prices come down? And how high will interest rates go up?
Here in the DC area, if a house is priced right and in good condition, it is still getting multiple offers. What’s happening in your neck of the woods?
I hope you got some value out of todays video. Its a lot of work to put these together but I feel its really important to give you the most up to date information so you can make the best decisions for you and your family.
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And if you would like to see some other housing market forecast videos, definitely check out these 2!
Thanks for watching.