Housing Market Crash: Why Home Prices Will Fall 20% in 2023

0

Source: SewCream / Shutterstock.com

The notion of a crash in the real estate market has never been more tangible. Home sales are declining, mortgage rates are still high, and housing construction is lagging behind. In July, average home prices fell 0.77% from the previous month, the “first monthly decline in nearly three years.” This has led some to believe that a major correction is imminent.

Under normal conditions, home prices almost always increase over time. Real estate is a finite commodity and, particularly in the US, residential construction has lagged far behind demand for homes. However, the recent price increase since the pandemic began is historic. Property prices have risen nearly 40% since March 2020 alone.

However, purchasing conditions are deteriorating rapidly. Home sales are declining rapidly in response to newly hiked mortgage rates. In July 2022, US existing home sales declined to an adjusted annual rate of 4.81 million. That’s the lowest level since May 2020 and is below expectations at around 4.89 million. It is also the sixth consecutive month of falling home sales per trade economics.

There are obstacles to a housing crash, chief among them a tight supply of homes coupled with a slowdown in housing construction. However, housing demand is clearly facing significant pullbacks as the Federal Reserve continues its tightening agenda. Should mortgage rates rise too high, along with falling wages, due to a possible recession, it cannot be ruled out that house prices could suffer significant losses as demand for real estate falls. The question remains: How far can house prices fall?

The housing market crash will leave some areas ripe for a 20% pullback

According to Ian Shepherdson, chief economist at Pantheon Macroeconomics, US housing prices could well be “about 15% to 20% overvalued.” In fact, single-family home listings are up 40% over the past four months while sales have fallen sharply, setting the stage for a potential market-wide pullback.

According to Shepherdson, the conditions are in place for house prices to fall:

“The market is adjusting to a new reality, with much lower sales volumes and much more inventory. Prices will therefore have to adjust downwards, probably quite sharply.”

Shepherdson is not alone in this opinion either. Goldman Sachs has repeatedly been on the bearish side of the housing recession debate. Just this week, the investment banking giant urged its clients to brace themselves for a further slowdown in the real estate market. Goldman analyst Ronnie Walker stated:

“Our model suggests that house price growth will decelerate sharply over the next few quarters (+8½% QoQ ar in Q3, +3% QoQ ar in Q4, equivalent to +14% Q4/Q4 in 2022) as the Supply is imbalanced and demand continues to shrink, mainly due to lower demand.”

According to Moody’s Analytics, homes are “overvalued” by 25% or more in 183 of the 413 largest regional markets. As such, the company believes these markets could suffer setbacks of up to 20%. Meanwhile, Moody’s chief economist Mark Zandi believes the overall US housing market could suffer a worst-case scenario of a 5% decline.

While there are obvious obstacles to a sizeable fall in house prices, macroeconomic conditions certainly do not point to the sustained growth that housing construction has historically enjoyed. It remains to be seen whether a real estate recession will lead to a feared 20% fall in house prices.

At the time of publication, Shrey Dua held no position (neither directly nor indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.

With degrees in economics and journalism, Shrey Dua uses his extensive media and reporting experience to contribute well-informed articles, covering everything from financial regulation and the electric vehicle industry to housing and monetary policy. Shrey’s articles have been featured in Morning Brew, Real Clear Markets, the Downline Podcast, and more.

Share.

Comments are closed.