Is a Correction in Home Prices on the Horizon?
Buyers have been facing the painful one-two punch of high mortgage rates and rising home prices all year. Mortgage rates hit a two-decades high at 8% in late October, and have dropped only slightly.
However, mortgage rates slipped to a two-month low last week to 7.29%, somewhat of a welcome sign for buyers and sellers waiting on the sidelines to break into the housing market. But housing affordability is still the worst it’s been in decades thanks to home prices that just aren’t letting up.
The Impact of Low Mortgage Rates
According to Christopher M. Naghibi, EVP and COO at First Foundation Bank, many homeowners are reluctant to sell and move due to their current low mortgage rates, which are well below the market rates. This has created an unprecedented and precarious situation in the housing market.
However, some housing experts and economists predict that home prices could decline next year, which could help relieve the stagnant housing market. Morgan Stanley forecasts a 3% average drop in home prices in 2023 due to the growth in inventory offsetting the increased demand.
There are already signs that the thaw has begun. Wells Fargo senior economist Charlie Dougherty believes that recent drops in mortgage rates and the increase in mortgage applications indicate a defrosting of the housing market. This is an encouraging sign that lower mortgage rates are starting to breathe new life into the market.
Zillow also forecasts that home prices may not rise as much as expected. They have adjusted their Zillow Home Value Index to grow by 3% in 2023, down from the previous forecast of 3.3% growth. One reason for the downgrade is the elevated mortgage rates, but recent inflation data provides promising signs for the future of mortgage rates.
The Unaffordability of Homes
The leading candidate to eventually drive home prices down is the unaffordable nature of homes today, says Naghibi. The average monthly mortgage payment has gone above $2,500 for the first time in history, making homeownership increasingly expensive for many individuals.
Home prices have been steadily increasing over the past seven months, with a nearly 6% growth since January. Currently, the average cost of a home in the U.S. is $311,500. However, Redfin CEO Glenn Kelman believes that a drop in home sales prices is not only possible but likely, as buyers and sellers begin to reach common ground on pricing.
Economists’ Predictions
Economists are divided on where home prices are headed. According to Aleksandar Tomic, economist and associate dean at Boston College, there are strong pressures in the housing market from both sellers who are reluctant to give up their low-rate mortgages and potential buyers who are priced out of the market. Tomic suggests that interest-rate cuts from the Federal Reserve or economic downturns could lead to a decline in home prices.
Wells Fargo still forecasts that home prices will rise, and the most likely scenario for a decline in home prices would be a significant increase in inventory. However, a slight decline in prices will not solve the issue of housing affordability on its own. Naghibi believes that a combination of increasing wages, decreasing rates, and dropping home values is necessary to address the affordability issue.
