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

Home prices could fall 8 percent, but higher mortgage rates and a “moderate recession” will dampen savings in buyers’ pockets, according to a new US housing market forecast from Capital Economics.

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Although home prices are expected to fall as much as 8 percent next year, rising mortgage rates, inflation, a mild recession and other economic headwinds will prevent homebuyers from seeing the difference in their pockets, according to a new analysis by independent research firm Capital Economics. ‘ else US housing market outlook.

The London-based firm said that sustained interest rate hikes will push the US into a “moderate recession” during the first quarter of 2023, as the Federal Reserve works on Return inflation to normal By the fourth quarter of 2023. Meanwhile, Capital Economics said that companies will continue their cost-saving measures, which means raising sales prices and reducing the workforce.

“Since it is unlikely that we will see an improvement in affordability anytime soon, many buyers will be shut out of the market, while others will simply not want to make a purchase,” the news analysis states, Posted earlier this month. “With bidders scarce, more market power will shift from sellers to buyers.”

“We expect aggressive monetary tightening from the Fed to push the core inflation rate below the 2 percent target by mid-2023,” added Sam Hall, real estate economist at Capital Economics. Core inflation proved more persistent, rising in the third quarter on the back of a rally [home] the prices. “

“But with commodity shortage pressures already fading, and rising unemployment likely to push down wage growth, core inflation will soon start to decline sharply as well,” he added.

All of these macroeconomic factors will affect sales in 2023, Hall said current mortgage rates Wiping out the benefits of falling home prices. For the middle-income household buying a median-priced home, the boom in mortgage rates from May 2020 to October 2022 nearly halved their purchasing power with mortgage payments as the share of income rose from 13.3 percent to 28.5 percent. – which is the worst since 1985.

Hall said that will be the landscape for homebuyers through the majority of 2023 until mortgage rates fall into the five percent range during the fourth quarter. The decline in mortgage rates and house prices will provide some relief, as the report predicts that mortgage payments as a share of income will decline from a 37-year high in October at 28.5 percent to about 22 percent by the fourth quarter and 20 percent by the second quarter of 2024.

Although this would give a much-needed boost to experienced and well-financed buyers, Hall said it wouldn’t do much for it. first time buyers With low incomes and a less-than-perfect credit history.

“This will drive many first-time buyers out of the market, causing the homeownership rate to stall,” he said. “How much extended affordability affects demand also depends on what happens to credit terms. But with house prices lower, we suspect banks will ease terms over the next year.”

With poor housing starts, weak existing home inventory growth and volatile buyer demand, the report said home sales will be off to a slow start in 2023 as consumers remain on the sidelines and wait for better conditions.

“Higher interest rates will discourage many homeowners from moving into a home for fear of missing out on the current interest rate, so the upside in existing inventory is likely to be modest,” the report states. Lower sales will also lead to a higher number of new homes for sale in the near term. But new inventory will soon drop sharply as completions slow.”

Hall said sales of existing homes and new homes in 2022 will fall year-on-year to 4.2 million and 450,000, respectively. However, existing home sales are expected to close in 2023 at 4.5 million before hitting 5.0 million in 2024. New home sales will follow a similar path, the report said.

For potential buyers who find themselves locked in rental marketThey will find a more challenging landscape for affordability as rental demand as a share of their income increases from 37 percent in the first quarter of 2021 to 42 percent in the third quarter of 2022. However, this share is expected to decline in 2023 with lower Annual rent growth to 0.5 percent before rebounding to 1 percent in 2024.

“The big picture is that affordability will extend for most of next year,” the report said.

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