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Home prices have soared in recent months and held high in June as first-time U.S. home buyers were squeezed out of the market and sales began to decline as fewer people could afford to buy a first or second home .
Will Home Prices Go Down
As of last month, the median new home sale price in the U.S. was $402,400, while the average sales price was $456,800. Those averages are slightly lower than in May, when the median new home sales price was $449,000 and the average sale price was $511,400.
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In June, the median existing home sales price was $416,000, 13.4% above the June 2021 average price of $366,000. It was the 124th consecutive month of year-over-year gains.
Analyst Dennis McGill told his firm Zelman & Associates to expect home prices to start falling in 2023. In this photo, green grass is seen in front of houses in a Los Angeles neighborhood on July 5, 2022. FREDERIC J. BROWN/AFP via Getty Images
“We do think house prices are going to fall, deflationary across the country,” said Dennis McGill, director of research at Zelman & Associates.
When Zelman & Associates released their housing market forecast last December, they already expected a “small decline” in existing home prices in 2023.
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“Every forecast since then — the March forecast and the June forecast — we’ve increased our expected decline,” McGill said. “As a result, we’re now expecting a decline of around 4% in 2023, 2024 is expected to be down 5%, and that’s in existing home sales. In new construction, we’re also expecting negative prices.”
Consultants McGill and Zelman base their forecasts on the fact that they have observed a mismatch between supply and demand in the real estate market over the past few years. That’s due to more people looking to buy a home, and mortgage rates are relatively low during the pandemic, when inventory is very limited and new construction has stopped.
But as new home construction picks up, experts at McGill and Zelman expect “almost a reversal of the past few years, when demand was strong but supply failed to respond.”
“Now you’re going to see the other side of the coin where supply will outstrip demand and there will even be a price adjustment to clear the market,” McGill said.
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The regions likely to experience the sharpest price changes are those that tend to be more “boom and bust” — an economic term to describe cycles of growth and recession.
“Phoenix has been leading in previous cycles. It tends to have more booms and busts, it tends to attract more institutional capital and investor capital,” McGill said.
Other markets that have also benefited from unusual pandemic demand include Boise, Idaho and some mountain states, which have seen more investors jump in and out of the market, he added.
Changes in supply will also be an important factor in determining the most dramatic price declines, McGill said.
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“Depending on the product, regions with more planned supply and more deliveries over the next six to 18 months will clearly be at greater risk of oversupply,” he said.
“So when you think about builders’ land investment targets, built-to-rent single-family and multi-family properties are also targeting their properties, and these are in many of the parts of the country that are considered to be growing faster: Florida, Texas, Carolina, Georgia, etc… so when those projects come to market, it just increases the risk of more competition and thus price risk.”
Things could get worse before they get better, and the Fed is bound to raise rates again, a move that is sure to impact mortgage rates and make home ownership more affordable for many.
But experts expect the hot housing market to continue to cool and slow as unaffordability leads to a drop in home sales. Many sure hope they’re right.
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Talk about 180 degrees. Not only is the pandemic housing boom that drove U.S. home prices up 42% over the past two years over, but we’re seeing it give way to a “housing recession.” Across the country, home sales have plummeted and inventory levels have soared. The economic contraction led to a slowdown in the housing market, which grew at the fastest pace since 2006.
Looking ahead, the real estate market will continue to slow down. The Fed puts upward pressure on mortgage rates as a way to temporarily crowd out homebuyers. The ensuing drop in home sales led to an economic contraction across the economy. It has already led to layoffs in industries such as homebuilding and mortgage lending. Soon, there will be less production of durable goods such as windows, and less production of commodities such as lumber and steel. That should help keep inflation in check as the contraction spreads across the economy.
Interest Rates Affect Home Prices
“The most common way we get into a recession is for the Fed to raise interest rates to fight inflation … the leading indicator for this type of recession is housing,” Bill McBride, author of the Calculation Risk Blog, told us
McBride is an authoritative expert in the field of real estate cycles, he believes that the United States will not experience a full-blown recession this year. However, he said the weak housing market is telling us that a Fed-induced recession may be on the horizon.
Now that the U.S. housing market is in recession, it begs the question: What’s next for house prices? On Tuesday, the Case-Shiller U.S. National Home Price Index will report double-digit home price growth between May 2021 and May 2022. However, this data has a lag. Industry insiders say the real story is a sharp slowdown in price growth. By this time next year, McBride predicted, home prices could be up 0% year-over-year. (Freddie Mac disagreed and said national home prices would rise another 4.4 percent.)
Regardless of where national house prices go next, the picture won’t be the same across the country. Markets like Boise and Phoenix are already shrinking significantly faster than the rest of the country.
Boston Real Estate Blog
Contacted CoreLogic to inquire if the firm would provide us with an assessment of the nation’s largest regional housing market. To determine the likelihood of a region’s home price decline, CoreLogic assessed factors such as income growth forecasts, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates and inventory levels. CoreLogic then classifies regional housing markets into one of five categories and groups them based on the likelihood that home prices in that particular market will fall over the next 12 months. Here are the groupings the real estate research firm used for its July analysis:
CoreLogic forecasts that U.S. home prices will rise another 5% between May 2022 and May 2023. That’s national. From a regional perspective, the situation will vary greatly.
CoreLogic found that in 98 of the 392 regional housing markets studied, there was a greater than 50 per cent chance that local home prices would fall in the next 12 months. In June, only 45 markets saw a change in price decline of more than 50% over the next 12 months. In May, only 26 markets fell into this camp
“Fears of cooling demand in the housing market are spreading across more markets, especially as more home sellers are starting to lower their asking prices and home price growth is slowing. Number of markets with more than a 50% chance of price declines CoreLogic Deputy Chief Economist Prices have again doubled compared to the previous month, but remain concentrated in areas where price growth has been particularly strong over the past two years or where there has been an exodus, according to analyst Selma Hepp.
Will House Prices Go Down In 2023?
Of the 392 regional housing markets measured by CoreLogic, 84 were in the “very low” risk category in July. Another 145 housing markets were in the “low” group, 65 were in the “medium” group, and 70 were in the “high” group. CoreLogic classifies 28 regional housing markets as having a “very high” chance of price falls in the coming year. That includes key markets like Boise, Philadelphia and San Francisco. This “very high” group also includes several small and medium-sized markets on the West Coast and Northeast.
In some high-risk markets, including San Francisco, the “peak” in housing prices may have already been blown. Home prices in the Bay Area have dropped month after month. It remains to be seen whether these price declines will last long enough for the market to truly turn negative year-over-year in 2023.
“We have really seen sales price declines over the past two months due to the double whammy of Nasdaq adjustments and adjustments.
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