In normal times, we’d now enter a predictable phase of the real estate cycle: spring’s brisk market. But this year, buyers are concerned about mortgage rates. Granted, rates are calming down a bit after touching 7% in March. And in some markets, property values seem to be cooling off.
Hopeful buyers are eagerly watching. First-timers want to finally experience the joy of owning their homes. And they want to know if the market slide has hit a bottom, or if home values could still drift downward from here.
Oddly enough, two key forecasters — the Zillow® Group and Moody’s — have contrasting outlooks on price action ahead for U.S. housing markets.
2022 Threw the Market a Curve Ball
Home prices soared more than 10% in early 2022. Then, in late 2022, home prices gave up nearly half of that gain. “It’s all about the Fed,” some said.
Jerome Powell, head of the Federal Reserve, was alarmed by signs of inflation. Once inflation got up to 7%, the Fed started hiking the federal fund rate — that is, the interest rate for banks. Indirectly, that put the damper on a phenomenal seller’s market.
Mortgage rates started climbing. The median home price came down — from a peak of over $400K, to $363,000 by early 2023. The seller’s market has been cooling down for a full year now.
Still, home values are holding up well in the Midwest. Cincinnati and Chicago home values are up more than .5% year-to-date. In the northeast and throughout the south and southeastern United States, too, prices are inching up.
Overall, let’s just say it’s a very pricey market out there.
Moody’s Prediction: The Market Will Keep Slowing—For Years
The higher they went, the harder they’re falling. The market’s running out of steam in San Diego, San José, and San Francisco, It’s fizzling a bit in Seattle and Portland, and in Denver and Las Vegas. Year-to-date, markets are down more than 2% in Boise, Austin, Las Vegas, and Phoenix.
It’s not as though, after all, the buyers out there all got raises. Most people who could buy did so when borrowing was a little cheaper.
Looking at the United States as a whole, Moody’s expects a 4% dip in home prices this year, and another 4% dip in 2024. If that happens, most of the great seller’s market peak will be flattened out.
Moody’s expects 98% of major metro areas to slide — for an overall 10% drop since the real estate market peaked in June 2022. But note that in the Moody’s predictions:
- The overall market value could drop more than 10%. Moody’s based the 10% prediction on a scenario where the 30-year, fixed-rate mortgage holds steady around 6.5%, and no serious recession takes hold.
- Home values could slide 15% to 25% from their peaks in the areas where property values puffed up the most.
The Moody’s analysts say newly built home sales will be down dramatically in 2023. They point to the combination of high home values and current mortgage rate levels as likely to slow buyers down for several years.
Zillow’s Prediction: The Market Will Hold Steady
The ordinary home buyer is not thrilled when rates for mortgages rise. And they have certainly risen over the past year or so. Remember how rates were still under 5% during last spring’s selling season?
But is a critical mass of potential buyers put off by the current rate trend? Zillow thinks not. Zillow reckons that homes in most of the major markets will hold or increase their current property values. Zillow analysts expect home values to go up in 2023, then, for a total rise of a half-percentage point.
In the Zillow analysis, the market has indeed hit a bottom. That means more buyers looking around in this spring season. And with demand continuing to outrun supply, Zillow says, home prices just can’t fall much more.
Recent comments from Sam Khater, Freddie Mac’s chief economist, seem to lend weight to Zillow’s forecast. A gentle dip in rates, combined with easing inflation, said Khater, is encouraging hopeful buyers this season. Freddie Mac reported the interest on a 30-year, fixed-rate mortgage at around 6.3% in April.
Not all approved borrowers qualify for this “average” rate, of course. Each buyer has a unique set of financial circumstances, and each buyer is looking for a specific loan amount and terms. The mortgage rate available for a borrower is also based on the planned down payment, as well as the borrower’s personal financial profile.
Will Mortgage Rates Get Lower?
It depends who you ask, because:
- Fannie Mae predicts the average rate in 2023 on a 30-year fixed mortgage for a primary residence will turn out to be 6.8%.
- Freddie Mac says 6.4% is a pretty good bet for the 2023 average.
- The Mortgage Bankers Association foresees mortgage rates dropping to 5.2% by 2024.
So who’s right?
Fannie and Freddie are probably guessing right, if the Federal Reserve continues to raise banking interest rates out of fear of persistent inflation. Over the past year, the Federal Reserve bank has hiked interest rates nine times, trying to throw cold water on demand and reverse inflation.
Now, inflation actually is slowing down. What if the Federal Reserve’s decisions wind up sending the country into a recession? Then, the Mortgage Bankers Association is more likely to be right. Rates will have to be eased if the economy stalls and we see significant job losses.
All Things Considered: Scant Progress on Affordability
A hopeful buyer/household can afford a mortgage, generally, if paying it back won’t take up more than 30% of their monthly income. And right now, only one out of every five homes for sale is affordable to the average buyer, by that definition. That’s according to the numbers from Redfin.
Home price rises have slowed over the past year. And this could be a trend. Moody’s analysts think the current market is likely feel off-putting to potential buyers for several years. That’s because many people still can’t afford to buy. Today’s hopeful buyers face multiple headwinds. Prices are still quite high, and there are more people who need homes than there are homes for sale.
All things considered, the U. S. real estate market isn’t exactly a welcome wagon. A whole lot of hopeful homeowners have been sidelined for years. It shouldn’t take the pain of a recession to make homes and home loans accessible to those who need them.
Supporting References
Lance Lambert for FORTUNETM via Fortune.com (Fortune Media IP Limited): Housing Market Analysts Are Divided: Zillow and Moody’s Issue Starkly Different Home Price Forecasts for the Nation’s 400 Largest Markets (Apr. 9, 2023).
Leslie Cook for Money via Money.com (Money Group, LLC): Mortgage Rates Tick Lower – Freddie Mac (Apr. 13, 2023; citing a press release from the Mortgage Bankers Association).
Dan Weil for TheStreet® via TheStreet.com: (TheStreet, Inc.): US Housing Market in Trouble: Moody’s Predicts Home Prices Will Fall in 2023 and 2024 (Apr. 3, 2023).
Kevin Graham for Rocket Companies via RockeetMortgage.com: Mortgage Interest Rates Forecast For 2023 (Mar. 25, 2023).
And as linked.
Photo credits: Pavel Danilyuk and Anna Shvets, via Pexels.