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US Housing Market Predictions 2023: Will Home Prices Drop in 2023: What Do Market Trends Predict?

Here’s when home prices can drop. While this may appear to be oversimplified, it is how markets work. Prices drop when demand is met. There is now an excessive demand for houses in several property markets, and there simply aren’t enough homes to sell to prospective purchasers. Home construction has increased in recent years, although they are still far behind. Thus, big drops in housing prices would necessitate considerable drops in buyer demand.

Demand falls mostly as a result of higher interest rates or a general weakening of the economy. Rising interest rates would ultimately need far less demand and far more housing supply than we now have. Even if price growth slows this year, a drastic fall in home prices is quite unlikely. As a result, there will be no fall in house values; rather, a pullback, which is natural for any asset class. According to many experts, in the United States, house price growth is forecasted to “moderate” or maybe slightly drop in 2023.

What’s happening in the housing market right now? According to recent weekly data from Realtor.com, despite the advantages for buyers in today’s housing market, where inventory remains scarce, a significant number of existing homeowners are choosing not to sell. Consequently, new listings continue to fall behind the levels seen a year ago, resulting in a slow-moving housing market.

However, the pressure on home prices has alleviated due to high mortgage rates, with asking prices increasing by less than one percent compared to the previous year. Recent trends suggest that home prices may dip below year-ago levels in the coming weeks. While this may be good news for homebuyers seeking lower prices, the impact could be mitigated by higher mortgage rates, potentially erasing any potential savings.

Median Listing Price Growth

The median listing price grew by just 0.7% compared to the previous year. After a pause in late April, home price growth eased in mid-May. While the national trend provides a broad context, it’s crucial to consider local market trends for making individual decisions. Data indicates that these trends vary across different regions.

In the Northeast, for example, median home listing prices remained up by double digits compared to one year ago, while the South and West saw single-digit increases. The relative affordability of markets in the Northeast and Midwest continues to attract buyers, as highlighted in the April 2023 Hottest Markets report.

New Listings

New listings, which indicate the number of homes put up for sale, were down by 26% compared to the previous year. This decline in new listings has persisted for 46 consecutive weeks, with this week’s data matching last week’s drop. The reluctance of existing homeowners to sell can be attributed to the fact that many of them hold mortgages with rates significantly lower than the current market rates.

Notably, investors, who were not major contributors to the housing market as sellers since the mid-2000s (except for the early stages of the pandemic), have seen their buying activity decline faster than their selling activity since the second half of 2022. If this trend continues into 2023, investors may contribute more new listings to the market as sellers.

Active Inventory Growth

The growth of active inventory has slowed down, with the number of homes for sale increasing by just 20% compared to the previous year. While the inventory level is higher than last year, the rate of growth has diminished compared to recent weeks. As discussed previously, further slowing of inventory growth is expected. This has led some home shoppers to consider newly built homes, as existing home sales have declined in recent months. Buyers, facing limited inventory, see new construction as a viable alternative.

Time on Market

Homes spent 15 additional days on the market compared to the same period last year. For the past 44 weeks, it has taken longer to sell a home compared to the corresponding week of the previous year. This gap has exceeded two weeks since January. However, April housing data revealed that homes were on the market for just 49 days, which is faster than any pre-pandemic month since Realtor.com’s data history began in 2017.

The market has certainly slowed down from the frenzied pace seen when mortgage rates were at record lows. Nevertheless, homes continue to spend fewer days on the market than was typical before the frenzy, indicating an ongoing imbalance of supply and demand resulting from a decade of underbuilding.

CoreLogic Home Price Insights Report: February 2023 Analysis and Forecast

The CoreLogic Home Price Insights report offers an extensive view of the Home Price Index (HPI) product with analysis up to March 2023 and forecasts up to March 2024. This report features interactive data that provide early indicators of home price trends. With HPI, turning points in the housing market can be anticipated sooner.

CoreLogic HPI Forecasts™ offer a 30-year projection of CoreLogic HPI levels for two tiers: Single-Family Combined (both Attached and Detached) and Single-Family Combined excluding distressed sales. This forecasting system provides insights for predicting trends for the next 12 months and beyond.

Home Price Trends

In March 2023, home prices nationwide, including distressed sales, experienced a year-over-year increase of 3.1% compared to March 2022. On a month-over-month basis, home prices rose by 1.6% from February 2023. It is important to note that these figures are revised with public records data to ensure accuracy.

Home Price Forecast

According to the CoreLogic HPI Forecast, home prices are projected to continue their upward trajectory. The forecast indicates an expected month-over-month increase of 0.8% from March 2023 to April 2023 and a year-over-year increase of 4.6% from March 2023 to March 2024.

Slower Year-Over-Year Growth

Despite the overall positive trend, the year-over-year home price growth in March 2023 slowed to its lowest rate since 2012. The growth rate fell to 3.1%, reflecting a decline from the previous year in 10 states, primarily in the Western region. This slowdown can be attributed to factors such as affordability issues, inventory shortages, and a shift in demand from higher-priced homes to median-priced homes.

Factors Affecting the Market

Several factors are contributing to the hesitancy of potential homebuyers. Inflation concerns, slowing job gains and wage growth, the potential for a recession, and elevated interest rates are causing some buyers to be cautious. The market is likely to experience a decline in annual home price growth during the spring and early summer months, with a potential rebound later in 2023.

Regional Variations

Home price trends vary across different regions of the United States. Some large metros have shown signs of improvement, with two consecutive months of monthly gains. The lack of inventory in the housing market and the impact of remote working conditions on mobility are contributing to these price increases in certain areas.

State-Level Insights

When analyzing home price changes at the state level, some interesting trends emerge. In March 2023, Arizona, California, Colorado, Idaho, Montana, Nevada, New York, Oregon, Utah, and Washington experienced annual declines in home prices. On the other hand, Vermont, Indiana, and Florida saw the highest year-over-year increases in home prices, with growth rates of 9.9%, 9.2%, and 8.9%, respectively.

Top Markets at Risk of Home Price Decline in 2023: Analysis and Forecast

The CoreLogic Market Risk Indicator (MRI) provides valuable insights into the health and stability of housing markets across the United States. By analyzing various factors and economic data, the MRI can assess the probability of a price decline in different metropolitan areas. Let’s take a closer look at some of the top markets at risk of a home price decline in 2023, according to the MRI.

Provo-Orem, UT: Provo-Orem, located in Utah, stands out as a metropolitan area with a very high probability of a price decline within the next 12 months.

Boise City, ID: Boise City, the capital of Idaho, is also identified as a metropolitan area at a very high risk of experiencing a decline in home prices. Despite being a vibrant and growing region, Boise City faces potential challenges that may impact its housing market.

Lakeland-Winter Haven, FL: Located in Central Florida, the Lakeland-Winter Haven metropolitan area is another region at a very high risk of a price decline. While Florida’s real estate market has seen significant growth and demand in recent years, this particular area faces unique circumstances that contribute to the potential for price declines.

Salt Lake City, UT: Salt Lake City, the capital of Utah, is known for its stunning natural surroundings and robust economy. However, the MRI suggests that Salt Lake City is also at a very high risk of experiencing a decline in home prices. This risk may be attributed to factors such as rising interest rates.

Ogden-Clearfield, UT: Ogden-Clearfield, another metropolitan area in Utah, is identified as being at a very high risk of a price decline. Similar to other regions, Ogden-Clearfield may face challenges related to affordability, supply and demand imbalances, or economic fluctuations.

Top Markets at Risk of Home Price Decline in 2023

Source: CoreLogic

U.S. House Price Index – March 2023

The Federal Housing Finance Agency (FHFA) has released the U.S. House Price Index for March 2023, indicating a 0.2% increase in January 2023 from December 2022. The annual change in house prices from January 2022 to January 2023 was 5.3%, while the 0.1% decline reported for December 2022 remained unchanged.

Seasonally Adjusted Monthly Price Changes by Census Division:

The FHFA’s report also indicates seasonally adjusted monthly price changes for nine census divisions in the US from December 2022 to January 2023. The Pacific division saw a -0.6% change, while the New England division saw a +2.0% change.

12-Month Changes by Census Division:

The report further highlights the 12-month changes in house prices by census division. The Pacific division saw a -1.5% change, while the South Atlantic division saw a +9.6% change.

Insights from FHFA:

According to Dr. Nataliya Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics, “U.S. house prices changed slightly in January, continuing the trend of the last few months. Many of the January closings, on which this month’s HPI is constructed, reflect rate locks after mortgage rates declined from their peak in early November. Inventories of available homes for sale remained low.”

Will Home Prices Drop

Source: FHFA

U.S. House Price Index Report – 4Q 2022: FHFA HPI®

According to the Federal Housing Finance Agency (FHFA), U.S. house prices rose 8.4 percent between the fourth quarters of 2021 and 2022. The U.S. housing market has experienced positive annual appreciation each quarter since the start of 2012. FHFA’s seasonally adjusted monthly index for December was down 0.1 percent from November. Here are the significant findings of the report.

State-Wise House Prices

House prices rose in all 50 states, while prices declined in the District of Columbia between the fourth quarters of 2021 and 2022. The five areas with the highest annual appreciation were Florida (15.2 percent), North Carolina (13.4 percent), South Carolina (12.9 percent), Hawaii (12.8 percent), and Maine (12.2 percent). The areas showing the lowest annual appreciation were the District of Columbia (-0.8 percent), California (2.3 percent), Idaho (3.1 percent), Oregon (3.6 percent), and Washington (3.7 percent).

Metropolitan Areas

House prices rose in all but six of the top 100 largest metropolitan areas over the last four quarters. The annual price increase was greatest in North Port-Sarasota-Bradenton, FL at 20.1 percent. The metropolitan area that experienced the greatest price decline was Oakland-Berkeley-Livermore, CA (MSAD) at -4.3 percent.

Census Divisions

Of the nine census divisions, the South Atlantic division recorded the strongest four-quarter appreciation, posting a 12.4 percent increase between the fourth quarters of 2021 and 2022. Appreciation was weakest in the Pacific division, where prices rose by 2.9 percent.

The Slowdown in House Price Appreciation

“House price appreciation continued to wane in the fourth quarter,” said Dr. Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics. “House prices grew at a much slower pace in recent quarters amid higher mortgage rates and a decline in mortgage applications. These negative pressures were partially offset by historically low inventory.”

house price trends

Source: FHFA

Conclusion: Will Housing Prices Drop in 2023?

The broader outlook from several housing analysts is that housing demand will continue to surge due to several factors. For e.g; the millennials have aged into their prime homebuying years, and they are now the fastest-growing segment of home buyers. In 2018, millennial homeownership was at a record low but the situation has changed markedly. They are no longer holding back when it comes to homeownership.

According to the 2023 Home Buyers and Sellers Generational Trends report from the National Association of Realtors, the demand for homes is increasing among baby boomers, who now make up the largest generation of homebuyers in the US, accounting for 39% of home buyers in 2022, up from 29% in 2021.

On the other hand, younger and older millennials’ combined share of homebuyers decreased from 43% in 2021 to 28% in 2022. Generation X made up 24% of total buyers, and Generation Z makes up 4% of homebuyers, with 30% of Gen Z moving directly from a family member’s home into homeownership.

Furthermore, buyers are now moving farther distances, with younger boomers moving the greatest distance at a median of 90 miles away. Additionally, all generations agreed that the most common reason to sell was to be closer to friends and family. Buyers expect to live in their homes for 15 years on average, up from 12 years in 2021.

Overall, the report suggests that demand for homes is growing among baby boomers and Generation Z while decreasing among younger and older millennials. Buyers are moving farther distances, with a desire to be closer to friends and family being the most common reason to sell. Buyers also view owning a home as a good investment, with a majority of buyers using a real estate agent to help with the purchase.

Hence, housing prices cannot drop drastically in 2023. Although the housing market appears to be cooling from 2023 through 2024, there are some bright spots. Economic forecasters, despite the recent recession, continue to expect robust demand from purchasers (millennials) and high home price increases in the housing market.

With homebuyers active and supply still lacking, the current trend of home prices will not see a major downfall. Despite a sluggish market and waning buyer enthusiasm, we anticipate that home demand will continue to outstrip available inventory. Increasing rental costs should add to this expected development.

However, as the number of available homes increases, the demand for housing should decrease owing to affordability concerns. As a result, we are not on the verge of a housing market crash. The rate of home price growth during the two years of the pandemic was unsustainable, and higher mortgage rates combined with increased inventory will result in slower home price growth but unlikely any big price decline.

It’s important to remember that the housing market is influenced by a multitude of factors, and predictions are subject to change as conditions evolve. Keeping track of market indicators and staying informed about economic trends can help buyers, sellers, and industry professionals make well-informed decisions.

As the US housing market moves forward in 2023, it will be interesting to see how the various factors impacting home prices unfold. The balance between supply and demand, affordability concerns, economic conditions, and policy changes will continue to shape the trajectory of home prices nationwide.

Whether you’re a potential homebuyer, seller, or industry observer, staying informed about the latest trends and forecasts can provide valuable insights into the US housing market. By understanding these dynamics, you can navigate the market more effectively and make informed decisions that align with your goals and aspirations.

Sources:

https://www.zillow.com/research/data/
https://www.fhfa.gov/AboutUs/reportsplans/Pages/FHFA-Reports.aspx
https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/
https://www.zillow.com/resources/stay-informed/housing-market-predictions-2023/
https://www.corelogic.com/intelligence/u-s-home-price-insights-march-2023/
https://realestate.usnews.com/real-estate/housing-market-index/articles/housing-market-predictions-for-the-next-5-years
https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index/
https://www.nar.realtor/newsroom/baby-boomers-overtake-millennials-as-largest-generation-of-home-buyers