2023 Home Price Forecast: More bears than bulls

Forecasts of home prices for 2023 from various institutions range from -22% to +5.4%. There is no consensus about the direction home prices will go. However, the tendency is towards the downside.

There is also the issue of forecasting the national median home price and the local housing market price. While we care about the national average home price projections, we do Much more About our outlook for the local housing market.

For background, I projected average US sales price increases of 8%-10% in 2022. My estimate was less optimistic than the majority of companies forecasting price increases of 12%-18%.

The median home price in the fourth quarter of 2021 was $423,600. The most recent available pricing data, Q3 2022, shows the median home price of $454,900, or an increase of 7.4%. Home price data for the fourth quarter of 2022 will be released in the first quarter of 2023.

Home price forecasts for 2023

Take a look at the 2023 housing price forecasts from some of the popular real estate organizations or real estate related organizations. They are everywhere!

All home price forecasts are subject to change over time as data points and conditions change. I will update the changes as they happen.

Home price forecasts for 2023

The most bearish housing projection for 2023

John Burns Real Estate Consultants (JBREC): -20% to -22%

Zonda: -10%

Goldman Sachs: -5% to -10%

Redfin: -4%

The most bullish home price forecast for 2023

Realtor.com: +5.4%

CoreLogic: +4.1%

National Association of Realtors: +1.2%

The most boring home price forecast for 2023

Fannie Mae: -1.5%

Freddie Mac: -0.2%

MBA: +0.7%

Zillow: +0.8%

My thoughts on extreme home price forecasts

When it comes to forecasting, it’s a good idea to look at the tail ends first. It helps to see who is delusional and if you have any blind spots.

downward call

I love the work of John Burns Real Estate Consulting (JBREC). However, they are very pessimistic and predict a 20% to -22% drop in home prices in 2023. A 20% drop in median home prices would drop the national median home price to about $364,000.

A price drop of 20% to 22% could mean a bigger drop than during the global financial crisis. Median home prices fell from $257,000 in the first quarter of 2007 to $208,400 in the first quarter of 2009 or -18.9%. What’s more, it took two years for the national median home price to drop 18.9%.

It is unlikely that the national median home price will fall more than it did during the global financial crisis half the time. Credit standards are much higher than they were before the 2008 crisis. Meanwhile, the vast majority of homeowners have closed in with mortgage rates below 5%.

If we say that this housing downturn is 30% as bad as it was in 2007-2009, we would come to a housing price decline of -5.7%.

More upside

On the flip side, there is a +5.4% housing price forecast by Realtor dot com. Realtor dot com is a website that helps you find a realtor to buy or sell a home. The realtor pays referral fees on closed transactions. The stronger the housing market, the more business Realtor dot com will generate.

It’s no coincidence that CoreLogic (+4.1%), National Association of Realtors (+1.2%), Mortgage Bankers Association (+0.7%), and Zillow (+0.8%) are looking for higher home prices in 2023. I’m afraid they are suffer from business bias.

With a Fed recession likely in 2023 and average mortgage rates rising, I think every prediction showing an increase in home prices in 2023 is wrong.

My home price forecast for 2023

With a conviction level of 75%, I expect the median home price for 2023 to drop 8% to $419,000. I assume the median home price will end in 2022 at $455K based on St. Louis Federal Bank data.

Reasons include:

  • Global recession by the end of 2023
  • The Fed insists on raising the final interest rate to 5% – 5.125% even though inflation is clearly declining and turning a year below 2%
  • A higher risk-free rate makes investing in riskier assets less attractive

The 8% drop in home prices is disappointing for landlords. However, real estate has outperformed the S&P 500 by more than 25% in 2022. Returning 8% isn’t all that bad, especially if you bought the liability or have a little bit left on your mortgage.

The reasons why I don’t expect housing prices to fall by more than 8% are:

  • 30-year fixed mortgage rates should fall 2% – 3% from their peak of 7% by mid-2023. 4% – 5% 30-year fixed mortgage rates should bring back demand.
  • The Treasury market has stopped listening to the Fed. The 10-year yield did not move after the Fed raised interest rates by another 50 basis points on December 14, 2022. The massive reversal in yield between the 10-year and 3-month Treasury indicates that the Fed is making a mistake. Mortgage rates for individuals are largely priced from the 10-year bond yield.
  • Consumers still have “excess” savings thanks to massive stimulus spending in 2020 and 2021.
  • Homes will continue to be in short supply. The vast majority of homeowners have 30-year fixed rate mortgage rates of less than 5%. Therefore, there is no need to sell most.
  • This will be a continuous shift of capital towards real assets and away from pseudo-financial assets such as stocks, cryptocurrencies, and anything else that provides no interest.

Downside risk for my negative home price forecast: despondency

One of the biggest unknowns is how much new housing will come to market during the traditionally strong spring season. If there are a lot of desperate sellers, we could see home prices drop by more than 8%.

You also have unconventional scenarios where the house price is too high and they become “old fish”. You may also encounter highly motivated sellers going through a divorce. A short sale can ruin the values โ€‹โ€‹of dozens of nearby homes.

The most recent single family home inventory in the United States
2023 stock could still be at least 20% below the 2015-2020 average

The other major downside risk to my negative home price forecast is that the Fed is more aggressive. Even though the Treasury market has stopped believing the Fed, the 5.125% rate on the fed funds will put pressure on consumer debt borrowers. Everything from credit card rates to auto loan rates will go up.

A minority of onerous borrowers can cause detriment to the majority with good finances. During the global financial crisis, even some elites decided to stop paying their mortgages, even though they had money.

It’s easy to see price declines of 8%+ in your local housing market, especially if your housing market shows the strongest gains in 2020 and 2021. Prices in Boise and Austin can easily drop 20% from their highs before hitting bottom if The Fed was still aggressive.

The biggest upside risk to my negative home price forecast: hidden wealth

I may be underestimating the liquid wealth held by potential buyers. Furthermore, I may be underestimating how much demand will return to the housing market if mortgage rates fall 2%-3% in 2023.

Personally, I have a lot of cash and short-term Treasury notes. So do all my friends. I have a feeling that many of the readers of Financial Samurai have a high amount of cash as well.

If so many of us are looking for housing deals in 2023, will housing prices really fall by the expected 8%? Maybe not.

When it comes to home prices, prices tend to go up faster than they go down due to fear of real estate. Thus, buyers may only have a six-month window to take advantage of significant price discounts.

Mortgage demand is very sensitive even to high rates

Take a look at this chart below. It shows a pickup in mortgage applications as the 30-year average fixed rate fell from 7.1% in October 2022 to 6.3% in mid-December 2022. It’s still 6.3% up from last year. However, applications for mortgage purchases increased by 13.8%.

And so if mortgage rates fall to 4%-5% by mid-2023, we could see a 25%+ increase in mortgage purchase orders. The longer the idle period in real estate transactions, the greater the pent-up demand.

Increased demand for real estate with lower mortgage rates

There will always be opportunities

Real estate continues to be my favorite wealth building asset class for most people.

Even if all of my holdings were down 10% on average in 2023, I wouldn’t care because I wouldn’t feel like it. I will continue to raise my family in our primary residence. Then I will continue to collect my rental income to help pay for our lifestyles.

An asset that provides both income and utility is the best type of asset class to own. However, tenant headaches, maintenance issues, and property taxes can get to even the most patient of real estate investors. As a result, diversification of investments in stocks, real estate, bonds and alternatives is recommended.

If you want to buy real estate in 2023, there will be plenty of opportunities to do so at more affordable rates. The combination of falling home prices and mortgage rates will make real estate more attractive by mid-2023.

When that time comes, I hope no one will come forward against me. Being able to purchase my current forever home after lockdowns began March 18th, 2020, was perfect. Had I faced competition, I would have easily paid 4% more.

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Reader questions and suggestions

Readers, what are your predictions for home prices for 2023 and why? Are you planning to look for deals in 2023? What makes you sell your property in 2023?

If you want to invest in real estate more surgically, take a look at Fundrise. I just had an hour-long conversation with Ben Miller, CEO of Fundrise. Her income fund generates a return of 8%+. Moreover, Fundrise uses its existing funds to search for distressed deals with returns of between 12 and 14%. Our views on home prices for 2023 are very similar.

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