Wondering what the market will do over the next six months? A recent forecast by Realtor.com predicts a drop in home prices even as inventory continues to dip. What does that mean for home buyers in this market? And what are sellers thinking?
“Conventional wisdom and the dynamic between supply and demand usually dictate that a drop in inventory is followed by an increase in prices, but this time that is not happening,” says Robert Elson of Coldwell Banker Warburg. “What we see now is a double whammy. The market is being squeezed from both ends; inventory is dropping, but so are prices.”
Elson says sellers feel locked into their low interest rates, but buyer’s costs are skyrocketing due to high interest rates and inflation.
We have some insight into how the forecast was compiled and what it could mean for your home search in the coming months, plus advice from experts on how to navigate this market.
Danielle Hale, chief economist at Realtor.com, says her team used to put together an annual forecast, but high volatility in the market in recent years necessitated a more frequent look at the whole picture. This mid-year forecast serves as a look at the second half of the year, and Hale estimates her team will release another forecast right after Thanksgiving.
“We use historical housing market and economic data to run our forecast model and make predictions,” she says, “so they’re based on what has happened recently in the housing market and economy, and we evaluate a bunch of different forecast models.”
From there, the data is weighed, with different weight placed on factors such as affordability and income growth vs. the growth of house prices, to set a forecast.
The midyear 2023 forecast shows that the number of annual home sales will continue to decrease. Originally, Realtor.com noted that 2022 was on track for 6.5 million home sales, but the final tally was 4.5 million. They’ve since readjusted this year’s prediction to 4.2 million sales.
Home prices were originally expected to increase by 5%, but Hale said the new forecast predicts they will drop this year by 0.6%.
“The reason we expect them to go down is, surprisingly, not all that different as to why we expected them to go up,” she says. “There’s a lot of price support from the fact that there’s not a lot of homes for sale and still more than enough demand to take advantage of inventory that is for sale.”
Perhaps the biggest factor in this forecast is the effect of the mortgage rate lock-in effect on homeowners, which Hale says is stronger than expected. Mortgage rates are predicted to end the year slightly lower at 6.1%, but many homeowners are still reluctant to sell, effectively trading their low mortgage rates for more than double what they’re paying in interest on a new home. As a result, Hale’s team has revised its original prediction for a growth in home inventory of 20% to a decline of 5%.
Another interesting take away in the forecast, Hale says, is the fact that many buyers are shopping out of state, a trend she chalks up to the increased number of remote workers who are choosing where to live based on cost of living.
If you find yourself on the sidelines, hoping for better market conditions, Scott Beaudry of Better Homes and Gardens Real Estate Universal says there’s a chance that sentiment among buyers will force the market to self-correct.
“In the past few years, housing prices have gone up quickly due to factors like limited availability and high interest,” says Beaudry. “As a result, many people can no longer afford to buy. This issue, along with rising mortgage rates, could lead to lower demand for housing, which may lead to lower prices.”
Beaudry adds that many other models predict such a correction in the market soon.
“Real estate markets go through cycles, and fast price growth is often followed by market corrections,” he says.
Elson agrees buyers shouldn’t wait to buy. Instead, he encourages them to continue the hunt for their ideal property.
“They should figure out what they can afford, find a home or apartment they really love, and be prepared to bid boldly,” he says.
While mortgage rates might be sky high, many say this is still a seller’s market.
“We aren’t alone in having expected the number of homes for sale to go up and a lot of people expected that would lead to price weakness, but that hasn’t happened,” Hale says. “But if you have a place you want to go and time to make a move—especially if you don’t have a mortgage and you have cash to buy, for example—it’s not a bad time to sell.”
Inventory is low, meaning there are fewer sellers on the market, and buyers have fewer options.
“Remember, it only takes two offers for a bidding war.”
Forecasts are simply predictions for the future. And they can be wrong, for better or worse, which is why many experts say they should be used as a tool—but not gospel.
“Predictions are exercises in pattern reading: More buyers plus fewer sellers equals higher prices. While those underlying patterns often point the way, they can get easily sidetracked by unforeseen events,” says John Walkup of UrbanDigs. “The COVID pandemic is a perfect example of how markets can be completely disrupted by exogenous forces despite recent but pre-event data suggesting a different course.”
“Our advice is always to buy when one is ready and when one finds a home that fits their needs: the non-financial value of real estate is not to be underestimated. Being happy in the home of your dreams? Priceless.”
This article was written by Kristine Gill from Better Homes and Gardens and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to email@example.com.