Most research firms and investors are forecasting that home prices will drop in 2023. For instance, Goldman Sachs predicts that home prices will drop by 5% to 10% from their peak. Others, like Freddie Mac and Fannie Mae, are less pessimistic, projecting home prices to retrace by about 1% this year. The expected retraction follows an uninterrupted 10-year run of increasing prices of both new and existing homes.
The data is corroborated by the S&P/Case-Shiller U.S. National Home Price Index, which is a benchmark of average single-family home prices calculated on a monthly basis. The leading home price index increased by 400% since the late 1980s, from roughly 64 points to a peak of 305 points in June 2022.
However, since its peak in June, the Index saw a drop of 2.5%. While not major by any measure, that small drop in Q2 2022 represents the first time in more than a decade that the home price index decreased.
Are we witnessing a change in the long-term trend, and will home prices drop in 2023? Or is the small decrease just a momentary lapse? We’ll aim to provide the answers to these questions in this article.
What has been driving the home price growth in years past?
Inflation-adjusted median home prices in the US peaked in May 2022 at $394,500, but have since dropped by roughly 2.7%. Source
In the last decade, the median home price in the United States nearly doubled, from $222,000 to almost $400,000. Meanwhile, the price of new homes increased from $292,000 in 2012 to $543,600 in 2022, according to Statista.
We could point to several different factors, including the scarce availability of new units, low rate at which new units enter the market, the growing share of potential homeowners, and so on. While all these aforementioned factors certainly played a role in the prolonged price home price appreciation trend, no other factor was as prevalent as the low cost of borrowing.
The housing price surge corresponds with a massive drop in mortgage rates between the 1980s and the early 2020s. Source
Since the early 1980s, mortgage rates dropped from a sky-high average rate of more than 18%, to an all-time low of 2.78% in July 2022 (data collected from Freddie Mac for a 30-year fixed mortgage).
At the same time as the mortgage rate was decreasing, the interest rates set by the Federal Reserve were also dropping. From more than 20% in 1981 to a virtually zero interest rate environment in the first half of the 2010s (to support economic growth after the 2008 financial crisis) and in 2021-2022 (in response to the Coronavirus pandemic).
The Fed rate reached its peak in 1981 at 20.70%. The subsequent fall to virtually 0% was accompanied by rising home prices. Source
The combination of low mortgage and interest rates was a combination that saw the real-estate market explode over the past couple of decades. The availability of cheap credit was one of the main reasons for the 2008 real estate bubble, which later turned into a full-on financial crisis. One would think that things would change drastically after that, but they really didn’t.
While the trend momentarily reversed in the years after 2008, it didn’t take long for housing market predictions to turn bullish and for the number of available housing units for sale hit new shortages.
However, with the inflation concerns mounting and the Federal Reserve responding with the largest interest rate hikes in 40 years, the value of homes could be at a turning point.
Will home prices drop in 2023? It depends…
There are indications that the multi-decade trend could be showing signs of reversal in 2023. For starters, the S&P/Case-Shiller U.S. National Home Price Index dropped by 2.5% since its peak in May. At the same time, the rate for a 30-year fixed mortgage increased from a low of 2.78% to 6.15% (see the 50-year mortgage rate chart above), and will likely continue to increase in the coming months.
The S&P/Case-Shiller U.S. National Home Price Index saw a 2.5% drop in the second half of 2022, its first drop in over a decade. Source
For some context, fixed-rate mortgages are directly tied to the 10-year Treasury rate – if the Treasury rate increase, the 30-year mortgage rate goes up, and vice versa. Over the past year, the 10-year Treasury rate increased by 88%, which is the main reason for the growing mortgage rates.
While the index data for the whole of Q4 2022 is not yet available, the change in mortgage and interest rates has already shown its impact on the median home prices in the US in the months of June, July, August, and October (see chart below). The 4-month streak of home price declines comes after an astonishing 124 months of consecutive home price growth.
In addition, the Real Estate Select Sector SPDR Fund (XLRE), a market-cap-weighted index of real estate stocks from the S&P 500, saw a considerable decline of more than 17% in the past 12 months. That could indicate that investors are expecting the real estate market to cool off going forward.
However, the trend of falling home prices could be quickly reversed if the Fed changes its stance on high interest rates. That could conceivably come to pass if the economic damage done by the growing rates becomes too high (high unemployment, poor stock market performance, difficulty getting a loan, etc.). If such a scenario were to unfold, we could see the Fed cave to the political pressure and start cutting rates. This, in turn, could boost home prices.
Experts have different opinions about whether or not home prices will drop in 2023
The opinions on whether a broader price decline is to be expected are somewhat mixed, even among professional investors and large real estate market players. Fortune has done a thorough examination of more than 25 financial firms and banks and collected their home price predictions for 2023 and 2024. Here are the predictions made by some of the most prominent companies in the industry.
Goldman Sachs’ home price prediction projects a 7.6% drop
Goldman Sachs (GS), which recently underwent its biggest jobs cut since the 2008 financial crisis, forecasts that home prices will decline by 7.6% from their peak. While the bank believes that the drop could be even more severe, it sees the housing supply shortage as the main reason that will prevent more extreme price declines.
Wells Fargo forecasts home prices to fall by 5.5%
Wells Fargo (WFC), another US investment giant, mostly agrees with Goldman Sachs analysts and forecasts that US home prices will fall by 5.5% in 2023. The bank noted that a large discrepancy in home price fluctuations can be expected, depending on whether a location is desirable or not.
Realtor.com estimates 5.4% growth in home prices despite poor macroeconomic conditions
On the other end of the spectrum is Realtor.com, a popular real estate listing website, which forecasts that the median price of existing homes will rise by 5.4% in 2023. While the company believes that the market balance will be tipped away from sellers, it notes that won’t be enough to stop continued price increases.
NAR projects home prices to increase by 1.2%
National Association of Realtors (NAR) also projects further growth and estimates that home prices will increase by 1.2% this year. In addition, the trade group projects mortgage rates to plateau at about 6.4%.
It is worth noting that most companies surveyed by Fortune are veering on the side of falling home prices, rather than the opposite. Here are three of the most optimistic and three of the most pessimistic outlooks for home price movements in 2023.
|Company Name||Home prices prediction for 2023|
Bottom line: Home prices are likely to drop in 2023, but don’t bet on it
While there are plenty of economic indicators that should, at least in theory, have a negative effect on the price of homes, the situation could suddenly change if the Fed changes its tune on rising interest rates. At this point, the Fed remains firm about its strategy of bringing down inflation at any cost, but that could change if the political pressure starts to mount.
It is worth noting that, historically speaking, an investment in real estate has always been one of the most stable investments one could make, and we don’t believe that is changing any time soon. If you are looking for other ways of building wealth with relatively low risk, check our selection of the best dividend stocks.
If you want to continue reading about economic forecasts for 2023, we suggest you give our examination of gas prices a read.
We may see housing inventory rise slowly in 2023. But until that happens, home prices are likely to remain high. And with mortgage rates being up, home buyers face affordability issues in multiple regards.Will house prices go down in 2023 usa? ›
Some regional markets are projected to see home price declines. In their latest forecast released in February 2023, they now predict that home values will fall in 326 of the nation's 895 regional housing markets between January 2023 and January 2024.Will the housing market crash in 2023 or 2024? ›
It doesn't look like a housing market crash is anticipated in 2023 in California. So far, market conditions for real estate in the state are good. According to the California Association of Realtors (CAR), home sales have declined 45.7% year to date in January.Should I buy a house now or wait for recession? ›
Lower Home Prices – There are fewer homebuyers during a recession. This low demand from the buy-side will cause home prices to fall. Therefore, you can typically get a better price on a home when buying during a recession. Less Competition – Fewer homebuyers means less competition and a more relaxed homebuying process.What is the property market outlook for 2023? ›
Advertisement. Huttons estimates that the supply of new private homes will pick up in 2023 to an estimated 10,000 to 12,000 units spread over 40 launches. This compares with 4,500 to 5,000 units in 2022 and 10,496 units launched for sale in 2021, according to Huttons.Is 2024 a good time to buy a house? ›
Given the current trend of a steady rise in housing prices and limited housing supply, the housing market in 2024 is likely to see modest growth, rather than any substantial increase or decrease.Will mortgage rates go down to 3 percent again? ›
Housing: 'People can't expect' to go back to a 3% mortgage rate, expert says. William Raveis Mortgage Regional Vice President Melissa Cohn speaks with Yahoo Finance Live about the current state of mortgage rates and why homebuyers shouldn't expect lower rates any time soon.Should I sell my home in 2023? ›
For most homeowners, now will be a better time to sell than later in 2023. That's especially true if you live in a market that saw rapid appreciation in recent years. Your real estate agent can help you understand pricing trends in your area, along with available inventory and demand.What will happen to mortgage rates in 2023? ›
Are mortgage rates expected to rise or fall during 2023? The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up. Some predict that fixed rates could fall below 4 per cent by early 2024.Will property prices fall in 2024? ›
On the home stretch. House prices in Australia will have fallen by up to 20% by the end of 2024, and NSW Transport Minister David Elliott's spear-throwing days are over: he'll leave politics at the March election.
House prices will fall by around 9% between the end of 2022 and September 2024, followed by a bounce back of 2.1% growth between 2025-26, according to analysis from the Office of Budget Responsibility (OBR) following last week's Autumn Statement.Will the housing market crash in 2026? ›
San Jose State University economist Fred Folvary predicted that crisis and believes the housing market is due for a crash every 18 years. According to Folvary, the next housing market crash cycle is expected in 2024, which he says will snowball into a great economic depression in 2026.Why you shouldn't buy a house right now? ›
Buying now puts you in a weak position
Everything from overextending the amount they can spend, overbidding by tens of thousands of dollars, waiving inspections, taking out high-interest loans, or borrowing from retirement funds to be able to “buy in cash” instead of taking out a mortgage.
Before a recession hits, home prices are typically at an all-time high. This means that selling your home before a recession will result in a higher profit between the purchase price of the real estate and the sale price, which can increase your capital gains taxes.Will houses become cheaper in recession? ›
Do home prices go down in a recession? Home values tend to fall during a recession. So, if you're searching for a home, you're likely to find: Homeowners who are willing to lower their asking prices. Homeowners doing short sales to get out from under their mortgages.Where will mortgage rates be in 2024? ›
The average interest rate for the benchmark 30-year fixed mortgage reached 7.08%, as of Monday. However, with the economy expected to cool and possibly dip into a recession, many recent forecasts expect rates to drop to 6% or below in 2024, including a Fannie Mae projection of 5.2%.Will the market go up in 2023? ›
While the market as a whole may tumble in 2023, some sectors may be poised to outperform amid a downturn. Higher rates have hurt growth stocks, but many value stocks have performed well, or at least not nearly as poorly.What should you not do when staging a house? ›
- Starting without a plan. ...
- Listing a home before it's ready. ...
- Not taking professional photos. ...
- Neglecting simple home improvements. ...
- Making major renovations. ...
- Not removing or replacing dated décor. ...
- Hanging pictures too high or too low. ...
- Using non-neutral colors.
Winter is usually the cheapest time of year to purchase a home. Sellers are often motivated, which automatically translates into an advantage to you. Most people suspend their listings from around Thanksgiving to the New Year because they assume buyers are scarce.Is 2025 a good time to buy a house? ›
After falling in 2023 and 2024, home prices are predicted to plateau in 2025 before rising again at just above the rate of inflation. However, due to the spike in home values from 2020 through 2022 due to record-low mortgage rates, median sales prices will take at least until 2027 to regain the highs of mid-2022.
You should stay in a starter home for at least 2 years but ideally, you'd stay for 3 – 5 years. The reasons include avoiding capital gains taxes and earning money on your investment, which we'll talk more about below. When do you plan to purchase your home?How high will interest rates go in 2023? ›
Bankrate (opens in new tab) predicts the Federal Funds rate will increase to around 5-5.25 percent in 2023. As a result, savings rates are expected to rise as well, with more high-yield savings accounts predicted to peak at 5.5 APY in the middle of this year, and many already surpass 4%.How long will high interest rates last? ›
How long will high interest rates last? Is there a chance they will go down in the next year or two? The truth is we don't know for sure. However, many industry experts believe within 18 to 24 months rates will be back to a more 'palatable' level.Where will interest rates be in 5 years? ›
They provide insight into interest rate forecasts over 5 years. An interest rate forecast by Trading Economics, as of 2 March, predicted that the Fed Funds Rate could hit 5% in 2023, before falling back to 4.25% in 2024 and 3.25% in 2025.What not to fix when selling a house? ›
Fixing cosmetic damage
Sure, peeling paint, a weathered back door and scuffed floors may make things look a little run-down, but if you are looking to save some cash on repairs and renovations, you'll rather want the money to be put to good use.
The spring months are often considered the best month to sell a house. In fact, across the country, the first two weeks of May are often the busiest and most lucrative time for sellers.
Nationally, the best time to sell a house is March if you're trying to sell quickly, while the best time to maximize profit is July. Zillow recommends listing your home for sale in March, but no later than Labor Day, based on historical market trends.Will mortgage rates go down in the next 2 years? ›
'Mortgage rates could dip to 3% by the end of 2024'
We think they'll probably stay at that level for the remainder of the year before being cut in 2024." Martin: "End of 2024?" Andrew: "We think they'll be down to 3% by the end of 2024."
The longer the fixed term, the higher the risk that average rates fall below yours and you pay more than you'd otherwise have to, you also lose some flexibility. Based on the current economic predictions for 2023/24 a 2 year fixed rate could be a good idea if you are able to lock in a good rate before the end of 2022.Will mortgage rates go down in the next 5 years? ›
Will mortgage rates go down in the next 5 years? Mortgage rates are likely to fall even farther in 2023, housing economists predict. Greg McBride, CFA, Bankrate chief financial analyst, expects 30-year mortgage rates to drop to 5.25 percent by the end of 2023.
Are mortgage rates expected to rise or fall during 2023? The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up. Some predict that fixed rates could fall below 4 per cent by early 2024.Will mortgage rates go down in 2024? ›
Average interest rates for the 30-year fixed mortgage are predicted to fall from 6.8% in 2023 to 6.1% in 2024, although they will still remain meaningfully higher than 3% in 2021 and 5.4% in 2022.What will mortgage rates be at the end of 2023? ›
The economy is likely to slow over the coming months, and as a result, mortgage rates will still end up lower than what they currently are by the end of 2023, Channel said. They aren't likely to plummet, but Channel said he expects they'll land somewhere closer to 5.5% than 6.5%.What will mortgage rates be in August 2023? ›
Most experts expect the base rate to settle around 4% to 4.5% by the end of 2023 and top fixed mortgage deals to fall to just under 4% within 18 months."How many years will interest rates stay high? ›
The truth is we don't know for sure. However, many industry experts believe within 18 to 24 months rates will be back to a more 'palatable' level.What will interest rates look like in 2024? ›
The average interest rate for the benchmark 30-year fixed mortgage reached 7.08%, as of Monday. However, with the economy expected to cool and possibly dip into a recession, many recent forecasts expect rates to drop to 6% or below in 2024, including a Fannie Mae projection of 5.2%.How many years will a house last? ›
The average lifespan of a newly constructed house is 70–100 years. Factors such as weak housing materials and damaging weather exposure can shorten a home's lifespan. Routine repair and maintenance can improve the longevity of a home.How high will mortgage rates get? ›
Mortgage Bankers Association: 5.7%
MBA's December 2022 Mortgage Finance Forecast puts the 30-year fixed mortgage rate at 6.2% in the first quarter of 2023, gradually falling to 5.2% by year-end. Joel Kan, MBA's vice president and deputy chief economist, estimates that rates will average 5.7% throughout the year.
'Mortgage rates could dip to 3% by the end of 2024'
We think they'll probably stay at that level for the remainder of the year before being cut in 2024."
Prediction: Rates will drop
At the end of 2022, inflation was 6.5% compared to 7.0% in 2021. Lower inflation, smaller interest rate hikes by the Fed, and growing recession fears will push rates down even further in February.”