The housing market is forecasted to undergo significant changes and surprises between now and 2027, according to the predictions. The market saw huge growth in prices and rents in 2021-2022, fueled by low-interest rates and limited supply. But this led to declining affordability.
The U.S. housing market has gone from being hotter than a cast iron skillet to colder than a landlord’s heart. Now, the market faces a correction period. Buyers were once tripping over each other to offer obscene amounts over the asking price, but now they’re standing around with their hands in their pockets as tumbleweeds blow through open houses.
Sources: NAR, Redfin, U.S. Census Bureau, Zillow, Yardi Matrix, FreddieMac
Home prices are expected to fall around 5-6% in 2023 as mortgage rates remain elevated and reduce buyer demand. Prices could potentially drop another 5% in 2024 before leveling off in 2025. Meanwhile, mortgage rates should decline somewhat after peaking in 2022, helping improve affordability. However, due to the sharp pandemic surge, home values likely won’t regain their 2022 peak until at least 2027.
With high prices and rates squeezing budgets, home sales are predicted to fall sharply in 2023 by around 18% for existing homes and 4% for new homes. But sales should start to gradually rebound in 2024 and 2025 as affordability improves. By 2027, existing and new home sales may recover by around 20% compared to 2022.
2023 Housing Market Prediction
“The past few years have been full of unexpected turns like an M. Night Shyamalan movie. Pre-pandemic projections went out the window faster than some of my New Year’s resolutions. Just when we think we’ve seen it all, 2022 throws us another curveball.”, Richard Uzelac added.
The housing market outlook for the next five years predicts a significant cooldown following the red-hot pandemic boom. Home prices and sales surged from 2020 to mid-2022 due to ultra-low mortgage rates and shifting housing preferences during COVID-19. However, rising rates, inflation, and economic uncertainty have now reversed the tide.
Median home prices are forecasted to fall around 5% in 2023 before leveling off through 2025. Appreciation will remain muted even as the market stabilizes, with prices not regaining 2022 peaks until 2027. The significant price growth of the past two years is unlikely to be repeated anytime soon.
On the sales side, both existing and new home sales are predicted to decline by double digits in 2023 as higher rates and prices push buyers out of the market. Sales will gradually rebound through 2027 but not fully recover to 2022 levels. Housing demand has cooled considerably from pandemic highs.One area that will remain strong is the rental market. With homeownership less affordable, rents will continue rising as demand increases, albeit at a slower pace than during the past two years. Median rents could increase 20-25% nationally through 2027, with higher gains for single-family rentals versus multifamily units. Landlords will retain pricing power in the near term.
On the supply front, starts and permits for new housing construction will contract sharply in 2023 as builders pull back. Single-family starts are expected to rebound modestly beginning in 2024 but will remain below 2022 levels in 2027. The multifamily market will be softer, with starts declining through 2025 before recovering slightly. Permits follow a similar trajectory but indicate overall construction will lag long-term needs.
The forecast calls for a broad housing market correction after the distortions of the pandemic. Price and sales declines, tempered rental growth, and limited new buildings paint the picture of a sector returning to balance after an unsustainably hot run. The correction will create some affordability relief, but supply shortages and strong demographics provide underlying stability.
Housing Issue in 2023
While some parts of the country have seen home prices start to moderate, the broader housing market remains mired in an affordability crisis. This is fueled by an inadequate supply of homes for sale. Mortgage rates are stuck at elevated levels, and median sales prices have rebounded since February to approach last year’s peak.
Specifically, the median existing-home sales price rose nationally from $396,100 in May to $410,200 in June, according to NAR. This jump makes June the second most expensive month on record, with prices just 0.9% under the all-time high of $413,800 reached last July. Despite emerging regional softness, the overall market remains extremely unaffordable for many prospective buyers.
Foreclosures Marching Up But Not Yet a Crisis
Foreclosure activity has been steadily increasing and may soon reach pre-pandemic levels, according to recent data from ATTOM Data Solutions. Filings were up 13% in the first half of 2022 versus last year. Experts expect further increases to become the norm in the near future.
“While still below historical averages, the notable jump in new foreclosure starts indicates rising activity could persist for years,” said ATTOM CEO Rob Barber.
In June, foreclosure starts rose 3% month-over-month and 8% year-over-year. Completions declined 20% from May but edged up 1% annually.
Maryland, Delaware, New Jersey, Connecticut, and Illinois had the highest state foreclosure rates last month.
However, most economists do not foresee a wave of foreclosures similar to 2008. Despite slowing home values in some areas, surging equity from recent price gains leaves most borrowers on solid footing.
Per ATTOM, 49% of mortgage-backed properties in Q2 2022 were equity-rich, meaning owner equity was at least double the loan balance. This buffer should prevent a foreclosure crisis in 2023, even if economic conditions worsen.
Richard Uzelac’s Key Takeaways:
It is unlikely that there will be a housing market crash in 2023 is unlikely since homeowners have substantial equity built up. The bigger issue is an affordability crisis, pricing many first-time buyers out.
- Buying a home to live in long-term can be smart regardless of timing, as you’ll ride out economic cycles. However, buying real estate as a short-term investment carries higher risk if done right before a downturn. Timing the housing market is difficult. Focus instead on your personal financial situation and goals. If you need a home and can afford it, buying can still pay off long-term.
Don’t stretch your budget to buy. Aim to have financial cushions for a downturn. Consider ARMs if concerned rates will fall in a recession. Focus on value rather than profits if investing. Look for properties likely to retain demand in a downturn based on location, amenities, rents, etc. The key is to assess your own needs, timing horizon, and risk tolerance. While a crash seems unlikely in the near term, preparing prudently based on personal circumstances is wise.
