U.S. Homes Could Lose a Fifth of Their Value Next Year

Real Estate

Red down arrow and stacks of gold coins in front of wooden house. Investment and real estate concept. | Image by Burdun Iliya, Shutterstock

Renowned Wall Street economist Ian Shepherdson of Pantheon Macroeconomics predicts the U.S. housing market could see prices fall as much as 20% in 2023 amid climbing mortgage rates.

Shepherdson expects “home sales to keep falling until early next year. By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances. Discretionary buyers are disappearing rapidly in the face of the near-400 [basis point] increase in rates over the past year.”

Most economists now anticipate the Federal Reserve will serve up another aggressive rate hike next month. Economists polled by Reuters expect the Fed to apply its fourth consecutive 75 basis point rate hike in November.

Shepherdson isn’t the only suit on Wall Street predicting home prices to slide. Economists at Goldman Sachs are similarly anticipating prices to lower, albeit not as much. Goldman analysts estimate home prices in the U.S. could fall a more modest 5% to 10% in 2023.

So far, in 2022, mortgage rates have already doubled. Typical 30-year mortgages averaged nearly 7% this week, up from closer to 3% in January. With two months left in the year and further rate tightening expected, mortgage rates may have additional room to grow.

Despite struggles for the sector in the current environment, median U.S. home sales prices were still up year-over-year last month, hitting $384,800, or 8.4% more than one year prior.

Still, rising rates tend to slow activity in the housing sector. Potential sellers, for example, might decide to remain in their homes to avoid signing a new mortgage with a higher rate on another property.

According to Shepherdson, with rates much higher now than just ten months ago, “It’s entirely possible that even people who want to trade down will face a bigger monthly payment… That’s a good reason to stay put, thereby constraining supply.”

In September, the unsold inventory of existing homes dropped for a second consecutive month, landing at 1.25 million. Shepherdson believes that the supply of available homes for sale will continue to fall in 2023. He thinks that “prices have to fall substantially in order to restore equilibrium.”

Volume has also slipped. The National Association of Realtors revealed that home sales in the U.S. dropped to 4.7 million last month, a 1.5% decline from August.

Nancy Vanden Houten, lead U.S. economist with Oxford Economics, thinks “inventory could increase modestly in the next month or two as homes sit on the market for longer, but new listings continue to decline as sellers retreat to the sidelines.”

Perhaps the most significant factor shaping the near-term future of the housing sector is the direction – and magnitude – of central bank monetary policy. As it stands, the market is bracing for at least one more big hike in November. Whalen Global Advisors, however, expect rates to climb even further, reaching double-digits by April 2023. If their prediction materializes, it could lead to a scenario not seen in decades, when mortgage rates peaked at 16.64% in October 1981.

Lisa Sturtevant, chief economist for Bright MLS, was not expecting such a steep climb in rates this year. Speaking with Realtor Magazine, Sturtevant said, “At the beginning of the year, it seemed very unlikely that mortgage rates would push past 6%… Now the question is, how high will they go?”      

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