I’ve seen predictions for where home prices will finish in 2023 that range from +5% to -25%. Here’s why I lean toward the upper end of that range, especially in our markets:
- The MBA purchase application index surged 25% last week from the previous week, with rates lower but still well above 6.0%, which indicates that buyers are still eager when opportunities arise.
- Using Redfin data for the four-week period ending 12/25/22, the national median sale price-per-square-foot has remained remarkably stable at around $194 after dropping from its peak of $210 last May, and the data does not yet fully-reflect recent improvements in mortgage rates and applications.
- All indications are that demand for housing remains strong: days on the market are still well-below pre-pandemic levels for the same time of year; weeks of supply are below pre-pandemic levels and trending down again; and the percentage of homes sold within two weeks of listing is still well-above pre-pandemic levels.
- All of this comes in the face of mortgage rates that are still roughly 300 basis points higher than in 2021 and very low affordability (see chart below).
- While there may be fewer buyers who can afford a home, there are also fewer homes to buy. This leads me to believe that we have landed at a level at which supply and demand are more equally balanced; it’s neither a buyer’s nor a seller’s market and barring a severe recession, that should lead to continued price stability. And if rates continue lower, that should bring out more supply as well as more demand.
For the most pessimistic home price forecasts to come true, the supply of homes hitting the market would need to approach the crushing wave of inventory that overwhelmed demand after the 2008 crisis and that just isn’t likely. Total active listings are still roughly 30% below the same period in 2019 and the number of new listings coming to market for the same period remains lower than that any of the last 3 years. With most homeowners reluctant to exchange their 3% mortgage rates for 6% rates and sensible underwriting standards in place, we are unlikely to see anything like the forced selling that occurred in 2008. And we should remember that conditions can vary greatly by region with the markets we serve proving to be especially resilient.
I’ve seen several pundits cite extreme low housing affordability as the catalyst for bigger price declines. But low housing affordability doesn’t mean that prices must decrease the same way that high affordability doesn’t mean that home prices must increase. After 2008, we saw more than a decade of extremely high housing affordability that would not have lasted as long as it did if consumers were driven only by relative affordability. Consumer preferences changed after the 2008 crash and consumer preferences changed again during the pandemic.
The biggest risk to home prices in 2023 comes from the fact that today’s mortgage rates reflect the market’s expectations that the Fed will ease sooner than what the Fed is indicating it will do and things could get ugly if the game of chicken goes wrong. More on that next time!