U.S. Home Prices Expected to Decline Modestly in 2023 Despite Higher Rates
According to property analysts polled by Reuters, U.S. home prices are forecast to decline modestly this year, but by less than previously thought. This is because demand has declined only slightly despite expectations that interest rates have further to rise.
Interest Rate-Sensitive Home Prices to Fall About 4.5% in 2023
Normally, interest rate-sensitive home prices have only fallen about 6% from their recent peak. However, the Federal Reserve is expected to deliver at least two more rate hikes, having already raised its key interest rate by 450 basis points from near-zero in just a year.
The poll of 29 analysts, conducted between Feb. 15 and March 2, forecast average home prices based on the Case/Shiller index, which rose around 6% last year, were forecast to decline 4.5% in 2023, followed by no increase in 2024. That is slightly less than the 5.6% fall predicted three months ago.
Renewed Strength in Housing Market Activity
Mortgage rates had been broadly declining since October but resumed their ascent in recent weeks on expectations the Fed will keep its federal funds rate higher for longer. But the latest housing data points to renewed strength in activity.
Crystal Sunbury, senior real estate analyst at RSM, a U.S.-based consulting firm, said: “Buyers are ready to get back into the market. However, volatile mortgage rates, which had dropped in January, encouraging sales activity, will continue to pose affordability challenges, limiting demand.””
Market Unfazed by Decline in Home Prices
The decline has hardly dented a market, following a surge of more than 45% in average house prices since 2020 as buyers rushed in to avoid missing out, while people who could not afford to buy have been left paying higher rents. While house prices probably had a bit further to fall, an overall housing shortage will broadly support these historically-elevated levels, Sunbury said.
Canadian and Australian Housing Markets Set to Mark Bigger Falls
Indeed, the U.S. outlook was a bit more optimistic than other similar housing markets, like Canada and Australia, which are set to mark bigger falls this year.
Affordability Challenges Limiting Demand
Although over 60% of analysts, 16 of 25, said purchasing affordability would improve over the coming year, they were split on how home ownership would change in the next two to three years. While 13 said it would decrease, 12 said it would increase.
“There are growing signs stretched affordability is weighing on home ownership, particularly for those (aged) under 35. We expect this to persist in the coming quarters,” said Sam Hall, property economist at Capital Economics.
Rental Prices to Surpass Core Inflation
As owning a home looks to be a distant dream for many, especially for those who have not seen such high rates in their lifetime, rents are also climbing. Rental price inflation, one of the primary reasons overall inflation has remained sticky, will average 2.1% this year and surpass core inflation in 2024 and 2025, the survey showed.
Independent Opinion
As an independent journalist, it is clear that the U.S. housing market is facing headwinds due to rising interest rates and declining affordability. However, it is important to note that the housing shortage will continue to support historically elevated levels of home prices, and the modest decline predicted by analysts may not be as severe as the 2007-08 global financial crisis.
It is also concerning to see that owning a home may become even more unattainable for many Americans, especially those under 35, as affordability levels are unlikely to return to pre-pandemic averages in the coming years. This could further exacerbate wealth inequality and make it difficult for younger generations to build long-term wealth through home ownership.
Overall, while there are challenges ahead for the U.S. housing market, it is not all doom and gloom. The housing shortage and overall strength in the economy should provide some support, and as always, there will be opportunities for those who are able to navigate the market effectively.
