This sharp contraction in the U.S. housing market — what the National Association of Realtors and the National Association of Home Builders call a “housing recession” — caused economists to rethink their housing forecasts for 2023. On Thursday, Zillow became the first real estate company to use July housing data to readjust its outlook.
Over the next 12 months, Zillow now predicts that U.S. home prices will only rise 2.4%. That’s down from the 7.8% expected a month earlier.
If the year-over-year growth rate of national house prices, which hit 19.7% in May, slows to 2.4%, it means that several markets will show lower house prices. . This is exactly what Zillow’s revised forecast predicts.
In July, Zillow economists predicted that five regional real estate markets would see lower home prices over the coming year. Now, Zillow economists predict that 123 regional real estate markets will see house prices plummet. In all, Zillow analyzed 911 markets.
The biggest drop in home prices predicted by Zillow (-4.6%) comes in Fairbanks, Alaska. Not too far behind are Charleston, W.Va. (-4%); Lake Charles, Louisiana (-3.8%); San Jose, California (3.6%); and Odessa, Texas (3.3%).
Earlier this month, Fortune dubbed Zillow the last “housing bull left standing”. But this downward revision makes it clear: Zillow is no longer bullish on price growth. If Zillow’s 2.4% rise materializes, it would be the smallest increase in year-over-year home price growth since 2012.
That said, don’t call Zillow a housing bear. Of the 911 regional real estate markets analyzed by Zillow economists, 780 markets are poised to see house prices rise over the coming year.
Of these, 140 markets are poised to experience home price growth of 5% or more. This includes markets like El Centro, CA (expected growth of 8.5%); Homosassa Springs, Florida (8.4%); Ocala, Florida (8.2%); Idaho Falls, Idaho (8%); Sebring, Florida (7.8%).
Going forward, the best housing metric to watch is inventory. If a housing market experiences a drop in house prices, it will first see a huge increase in inventory levels.
Nationally, active listings on realtor.com jumped from 128,200 last month to 747,500. This is the biggest jump in the site’s database dating back to 2016. A nationwide house price correction in August remains weak as inventory levels in the United States are 44% below pre-pandemic levels.
Sellers in some markets are not so lucky. Sparkling markets like Boise and Phoenix have already seen inventory levels soar above pre-pandemic levels. If inventories continue to soar, these markets could become the first to post year-over-year home price declines.
There is no consensus when it comes to housing forecasts for 2023. Companies like CoreLogic, Fannie Mae, Freddie Mac and Zillow are still predicting positive home price growth over the coming year.
Meanwhile, firms like John Burns Real Estate Consulting, Zonda, and Zelman & Associates all predict lower home prices over the coming year. Renowned economist Robert Shiller predicted the last housing bubble and thinks US home prices could drop 10%.
Why are home price predictions for 2023 everywhere? It comes down to uncertainty at the macro level.
If inflation proves persistent, the Federal Reserve could tighten more than financial markets currently expect. If that happened, mortgage rates would rise further. Conversely, if inflation recedes sooner than expected or a recession sets in soon, the Fed could ease financial conditions.
Ultimately, the Fed’s inflation fight is clearly responsible for the slowdown in the US housing market.
Declining activity in rate-sensitive sectors like housing is contributing to weakening the overall economy and dampening price growth. But any deviation from the Fed’s plan will of course have consequences for the US housing market. For this reason, it might be wise to take all housing predictions for 2023 with a grain of salt. There are simply too many unknowns.
Wherever we go next should be friendlier to shoppers. At least compared to the relentless pandemic housing boom.
“We come from a housing market where buyers had no bargaining power. This was the ultimate sellers’ market,” said Ali Wolf, chief economist at Zonda. Fortune. “What seems to have changed is a shift in power. We’re finally seeing some metros becoming buyer-friendly and other areas going straight back into the buyer’s market.”
Want to stay up to date on the US real estate market? Follow me on Twitter at @NewsLambert.
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