Home price forecasts for 2023

Housing prices rise and fall according to supply and demand. very simple. But since homes are not commodities like wheat and corn, it is very difficult to predict how much supply and demand there will actually be.

I’ve been tracking house prices for 40 years, but the sharp rise during the pandemic caught me by surprise. None of the usual economic forces were at play.

Usually, housing prices rise faster in the local market due to the economic boom spurring demand; The Houston oil boom of the 1970s, the New York financial boom of the 1980s, the Seattle tech boom of the 1990s, and most recently the San Francisco tech boom and the Bismarck shale boom.

These booms were easy to understand and affected only a few markets. The subprime mortgage boom of the mid-2000s was different. A lot of markets were affected, a lot of private and government action was involved, and it wasn’t clear exactly why housing prices were going up so much.

The boom that started in 2021 is again unlike anything we’ve seen before. This time all US domestic markets are affected; Prices have risen faster than they have ever been; The reason was not an increase in demand, but a decrease in supply.

I used to think that during a serious pandemic no one would want to buy or sell a home. I was half right, nobody wants to sell; But some people desperately wanted to buy.

So here we are. Prices have increased in all domestic markets by at least 20 percent and in many markets more than 60 percent. The boom is now over – finally killed by high mortgage rates – but will these high rates last?

Expect prices to drop in 2023

My projection model, built on the behavior of previous booms, projects house prices in 2023 to rise another 7 percent; But I don’t believe it, and neither should you. Because the reason for the price hike has disappeared – many people are now willing to sell – because interest rates will remain high, and because the threat of a new recession looms, there are now more sellers than buyers. Nationally, prices have already fallen from peaks in May and June and will continue to fall.

And since prices are rising so quickly in what turns out to be a weak market, they’re also going to fall quickly, perhaps too quickly if this recession were to occur. It took four years or so for home prices to adjust after the 2000s boom. not this time; I expect the prices to adjust over a period of two years at most.

How far can they fall? In the event of a serious recession, all bets are off, but the normal principle is domestic income. Prices will fall to the level supported by domestic income. Table A shows how much that is for ten large and ten smaller markets.

In markets with good economic growth, the adjustment may not be so dramatic. People always want to move to Florida and Texas — and more recently Utah and Idaho — so in some markets, prices may go to the side until income catches up. But I think the prices will be lower even in these markets.

What does all this mean for real estate participants?

Bankers should tighten the loan-to-value ratio for mortgages and should avoid more home equity loans; Fortunately for them, high interest rates have already limited cash refinancing. The speed of the boom meant that there was not enough time for banks to have problems financing new construction, but some new homebuyers would have problems with their mortgage.

Home builders have not had time to start many projects that depend on rising housing prices, but they must sell existing projects sooner rather than later.

Investors and homebuyers can now take their time finding the market and property they want and must make a hard bargain on prices. The whole process of listing a property for sale, then waiting for offers, then lowering the price, then waiting some more, then lowering the price some more takes months – which is why house prices don’t drop very quickly; But it also means potential buyers can start looking early in the year without committing themselves until later. And don’t worry if the first property you like is at a higher price than what you offer, there will be more later and at a lower cost.

Expect modest rent increases in 2023

Outrageous rent increases made the news, but the reality for landlords is that rents can only go up as high as tenants can afford. The increase varies from year to year, but over several years, average rents increase as much as average incomes.

Average rent increased by five percent in 2021. The increase may have been larger in 2022 as some landlords compensated for apartment rents during the pandemic, but it is likely to be lower in 2023 because landlords will see tenants leave and no one will want to sit. With very long ownership.

If inflation takes hold that prediction is out the window. But I think inflation, and above all the cost of energy, will continue to moderate in 2023 as the global economy slows, so rent increases will be low.

The significance of modest rent increases in 2023 is that while rental investors will be able to buy properties at lower prices, they still need to balance what they pay against the rents they can expect. Rents do not automatically rise to match housing prices, on the contrary; In real estate, the dog’s tail wags. How much you have to pay for the property depends on how much rent you can expect to get; Don’t expect too much.

Investors who have already bought at high prices will have to change their strategy. Either accept a lower return for a few years or invest more to upgrade to a different rental category. However, there aren’t many renters on the upper end, so subdividing into multiple units may be a better (though more expensive) plan.

Be careful in 2023

The turning point in every boom creates difficulties and opportunities. More than anything else, it creates uncertainty. I’m pretty sure house prices will come down, I’m pretty sure interest rates will stay high, and I’m pretty sure the recession we’re going through will be mild. But every economic time is different, so 2023 is a good time to be careful.