Prices will fall in 2023. But savings will be negligible due to headwinds

Prices will drop in 2023. But savings will be minimal: study

Home prices could fall 8%, but rising mortgage rates and a “mild recession” will blunt savings in buyers’ pockets, according to the new U.S. housing market outlook from Capital Economics.

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Although house prices are expected to fall 8% next year, rising mortgage rates, inflation, a mild recession and other headwinds will prevent buyers from seeing the difference in their pockets, according to new analysis. from independent research firm Capital Economics’ latest outlook for the US housing market.

The London-based company said a continued rise in interest rates will push the United States into a “mild recession” in the first quarter of 2023 as the Federal Reserve works to bring inflation down to lows. normal level by the fourth quarter of 2023. Meanwhile, Capital Economics said companies will continue with cost-cutting measures, which means raising selling prices and cutting staff.

“Given that we are unlikely to see an improvement in affordability anytime soon, many buyers will be shut out of the market, while others simply won’t want to make a purchase,” says the analysis from news published earlier this month. “As bidders become scarcer, market power will shift more from sellers to buyers.”

“We expect the Fed’s aggressive monetary tightening to push the headline inflation rate below the 2% target by mid-2023,” added Capital Economics real estate economist Sam Lobby. “Underlying inflation proved more persistent, rising in the third quarter on the back of rising [home] prices.”

“But with pressures from already easing shortages of goods and rising unemployment likely to depress wage growth, core inflation will soon start to fall as well,” he added. .

All of these macro factors will weigh on sales in 2023, Hall said, with current mortgage rates erasing the benefit of lower home prices. For a median-income household buying a median-priced home, the spike in mortgage rates from May 2020 to October 2022 nearly halved their purchasing power, with mortgage payments as a percentage of income falling from 13.3% to 28.5% – the worst since 1985.

Hall said that would be the landscape for homebuyers for most of 2023 until mortgage rates fall into the 5% range during the fourth quarter. Lower mortgage rates and house prices will offer some relief, with the report predicting mortgage payments as a share of revenue will decline from the 37-year October high of 28.5% to around 22% in the fourth quarter and 20 % in the second quarter of 2024.

While this will give well-financed and experienced buyers a much-needed boost, Hall said it won’t do much for first-time buyers with lower incomes and less-than-perfect credit histories.

“This will keep many first-time buyers out of the market, which will cause the homeownership rate to stagnate,” he said. “The extent to which tight affordability affects demand also depends on what happens to credit conditions. But with house prices falling, we doubt banks will ease conditions over the next year.

With weak housing starts, lackluster growth in existing home inventory and fickle buyer demand, the report says home sales will get off to a slow start in 2023 as consumers stay away and wait for better terms.

“High interest rates will discourage many homeowners from moving for fear of losing their current interest rate, so the increase in existing inventory is likely to be modest,” the report said. “The drop in sales will also lead to an increase in the number of new homes for sale in the short term. But new inventory will soon drop as completions slow.

Hall said existing home and new home sales in 2022 will fall on an annualized basis to 4.2 million and 450,000, respectively. However, existing home sales in 2023 are expected to close at 4.5 million before reaching 5.0 million in 2024. New home sales will follow a similar trajectory, according to the report.

For potential buyers who find themselves stuck in the rental market, they will find a tougher affordability landscape with asking rent as a share of their income rising from 37% in Q1 2021 to 42% in Q3 2022. However , this share is expected to fall in 2023, with annual rental growth falling to 0.5% before rebounding to 1% in 2024.

“The bigger picture is that affordability will be stretched for most of next year,” the report said.

Email Marian McPherson

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