What’s up everyone

The most frequent question I get asked these days when it comes to real estate is what do I think will happen to home prices in 2023? 

Will they continue to correct, completely crash or will they keep going up, even just a little, due to the lack of inventory.

And although the answer will differ depending on where you live as real estate is very localized, in the latest issue of Fortune, Lance Lambert shows 5 charts that will give us some clues as to where home prices are headed in 2023.

So lets take a look see what they are saying.

Lets dive right in

As we all know, since interest rates have gone up, prices have started to come down. 

In fact, it was after 124 consecutive months of prices rising between February 2012 and June 2022 that prices started correcting, ending with the last 3 consecutive monthly declines.

So while it’s pretty obvious prices have started to deflate, a lot of industry insiders still can’t agree on the future of home prices due to a lack of inventory.

Traditionally if there isn’t a lot of inventory, then demand on the homes that do come on the market will be high, so prices will stay high. 

Makes sense right? If there is only one good thing and 3 people want it, those 3 will compete for it, thus raising its value. 

But the housing situation today is different. 

We may not have a lot of inventory but demand is way down too. 

Lambert writes that mortgage purchase applications are down 38% year-over-year,  currently just below their lowest point during the 2000s housing crash.

Now, if interest rates go down in 2023, this may change as homebuyer demand increases. 

And as for inventory, Lambert writes that new listings on Realtor.com are down 17.25% on a year-over-year basis but inventory levels are currently UP 46.8% year-over-year. 

Basically, potential sellers who would also want to buy are choosing to stay in their homes with their low mortgage rates rather than sell and buy with a much higher rate. 

So how is inventory up so high but new listings on the market so low?

Easy- homes are sitting on the market longer since demand the lowest its been in a long time.

Let’s take a closer look at inventory data in the nation’s 400 largest markets with this first chart provided by Lambert and Fortune.

This map shows how much inventory levels have shifted over the past 12 months between November, 2021 and November, 2022

While national inventory levels on Realtor.com are up 46.8% year-over-year, this will change significantly depending on the market. 

Cities like Austin and Phoenix have seen their inventory levels go up 160.7% and 176% respectively, while markets like Chicago and New York City remain essentially unchanged.

This is a huge difference. 

Back in the housing crash of 2008, we had a Huge influx of inventory across the country due to sub prime lending which affected all of the buyers who could no longer afford their mortgages regardless of what market they lived in.

Today, it seems like the markets that boomed the most in the last 2 years are the markets that are correcting the fastest.  

Lambert writes that when it comes to inventory, the speed of change matters. A sudden inventory spike often marks a housing market that has moved into a full-blown correction.

And thats what happened this summer in markets like Austin and Phoenix, where home values are already down 10.4% and 8.1% from their respective 2022 peaks.

Check out his next chart 


Every quarter, Moody’s Analytics assesses whether local fundamentals, including local income levels, can support local house prices. If a regional housing market is “overvalued” by more than 25%, Moody’s Analytics deems it “significantly overvalued.” 

Lambert writes that the influx of high-earning remote workers saw home prices in boomtowns, like Boise and Idaho Falls, detach from local incomes.  

According to Moody’s analytics,  Boise is “overvalued” by 74%. 

But what happens when remote worker migration slows down and interest rates go up drastically? 

You’re left with locals who won’t be able to afford to buy a house.  So inventory sits on the market for longer and longer and Home prices begin to FALL.

Not everyone thinks prices will godown . 

Some firms, like CoreLogic and Home.LLC, doubt that U.S. home prices will fall in 2023 with inventory being this tight. 

Researchers at Morgan Stanley say those housing bulls should reconsider their stance.

“The fact that we expect home prices to start falling on an annual basis in March 2023 despite tight inventory reflects how unprecedented this affordability situation is in the U.S. housing market,” writes Morgan Stanley researchers who expect U.S. home prices to decline by around 10% from peak-to-trough even though supply remains below 6 months of inventory.

In November 2022, there were 751,544 active listings on Realtor.com according to the fortune article. 

That’s up from 511,899 listings in November 2021 and 683,606 active listings in November 2020. 

However, the number still remains far below the pre-pandemic active listing count of 1.14 million in November 2019.

So in order for prices to fall with such low inventory, does demand have to drop much lower than supply??

Rick Palacios Jr., director of research at John Burns Real Estate Consulting, tells Fortune “When demand abruptly falls off a cliff, the absolute level of supply isn’t as relevant. This is where watching the rate of change on both supply and demand separately is critical.”

He goes onto say that Investors accounted for the highest percentage of buyers ever in this housing cycle in many markets as well as Builders also accounting for roughly twice their historical market share – both of which don’t value home prices like a traditional owner would and will drop their prices much faster just to offload their inventory. 

In terms of national home prices, John Burns Real Estate Consulting expects a 20% to 22% peak-to-trough decline if affordability remains hampered by 6% mortgage rates next year.

Keep in mind Whenever a group like Morgan Stanley or John Burns Real Estate Consulting says U.S. home prices, they’re talking about a national aggregate. 

Obviously this will vary market to market.

Lamberts next chart shows 36 housing markets that are back to pre-pandemic inventory levels

Using Austin as our example,  You can see the 8339 in November 2022 is higher than 6907 of November of 2019.

I will put a link below with the chart if you want to see the other 35 markets 

In theory, higher inventory levels could push home prices down in those markets.

And finally, Lambert’s 5 chart shows the 364 markets that remain below pre-pandemic inventory levels.

Where I am in the DC area is one of them with 10,342 units in November 2022 compared to 13,877 units in November 2019. 

I’ll put the link below so you can see if your market is included in this list.

While Morgan Stanley researchers don’t think tight inventory will prevent home prices declines, they do believe tight inventory levels will prevent a 2008-style crash.

“Although supply doesn’t keep home price growth floored at zero, we do believe it prevents home price declines from becoming too large” writes Morgan Stanley researchers.

So what’s the bottom line?

The more inventory you have, with buyer demand so low due to high interest rates, the more likely prices will come down.

And the more over valued the market, the quicker prices will fall. 

But unlike traditional markets, low inventory doesn’t necessarily equate high prices.

 Esp if you add in builders and investors who can manipulate home prices faster by offloading their inventory at a discounted rate to minimize their losses.

So with all of the industry insiders contradictory predictions about the 2023 housing market in regards to home prices – the only thing I believe we can count on is that the market will continue to correct and if you are thinking of buying or selling, make sure you check with a local realtor to get the most accurate information  so you can make the best decisions for you and your family.

I wish you all a happy new year!

I appreciate you and I thank you for your support  and I’ll see  you next year!

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