Posted on November 15, 2022
Home prices will fall next year by 8%, as mortgage rates and a recession will continue to hurt affordability, a new report says.
The report by Capital Economics, published this month, which outlines its outlook for housing over next year, warned that sales will slump and housing prices will fall.
With lending standards still tight, and affordability poised to worsen, expect purchasing power to deteriorate, and housing prices to fall by 8% by mid-2023, the group said.
“Given that we are unlikely to see an improvement in affordability anytime soon, many buyers will be priced out of the market, while others will simply be unwilling to make a purchase,” the group stated in their report.
“As bidders become scarcer, market power will shift further from sellers to buyers,” they added.
Sellers, currently sitting on homes enjoying ultra-low mortgage rates, will be forced to accept lower prices over the next year, Capital Economics said. After home prices fall 8% in mid-2023, compared to this year, expect price growth to recover to 2.5% by the end of 2024, they added.
“After home prices fall 8% in mid-2023, compared to this year, expect price growth to recover to 2.5% by the end of 2024.”
— Capital Economics
Capital Economics also expects mortgage rates to “hold close to 7% over the remainder of next year” which means affordability will be at its worst since 1985.
For a household with a median income buying a median-priced home, the mortgage payment as a share of income rose to 28.5% in October 2022 from 13.3% in May 2020, the group said.
(The median listing price for a home in the U.S. is currently $425,000, up 13% over the last 12 months, according to Realtor.com. Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.
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Mortgage rates will go back down to 5.75% by the end of 2023, they forecasted.
The group also expects the U.S. economy to fall into a “mild recession” in 2023, and expects single-family sales to fall to the lowest level since 2011. It also expects single-family starts, or construction of single-family homes, to fall to the lowest level since 2014. The market will recover in 2024, they added.
Even though prices are expected to fall, people are likely to still find it hard to afford to buy a home, and more buyers will likely spill over into the rental market, Capital Economics added.
Some good news: Expect a surge in new supply next year as well, as builders complete construction on homes, which will prompt rents to fall 0.5% in 2023, they forecasted.