There was a historic monthly drop in housing prices, but home prices are still historically high.
Will the housing market get any better in 2023 and is it just the US that is struggling?
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Biggest monthly drop in home prices in the US in 11 years
The last two years, housing prices have been on the rise. Now, the market has hit a tipping point. Over the last few months, the prices of homes have been slowly decreasing. In July, the actual decline of the median home price fell 0.77% from June. This is the largest single-month drop in over 11 years.
The same report found that home prices have declined from the peak in more than 85% of the 50 largest U.S. housing markets. Home prices are down by more than 1% in a third of those markets. More than one in ten are seeing prices fall by upwards of 4%.
Even though July’s month-over-month decline is slight, it is the first price contraction in almost three years. Keep in mind, that this drop has been preceded by over two years of wild, record-setting price growth.
The annual rate of home price growth was 14.5% in July. However, it is still more than three times a long-term average. Keep in mind, most of that growth took place in the first five months of 2022– before interest rates started rising dramatically.
A tapering off of price growth may be a sliver of hope if you’re hoping to buy a home. However, prices are still historically high. The price dip is impacting homeowner wealth though. Last year, mortgage-holders’ tappable equity grew 25%. Equity growth peaked in May and then started to pull back again in June.
This means that homeowners are starting to lose wealth. Tappable equity is now down 5% in the last two months.
Will the housing market decline get worse in 2023?
The US housing market has been slowing down in the past few months. This is due to the growing interest rates. However, prospective home sellers should know that the housing market downturn is expected to worsen in 2023, according to Goldman Sachs. For those looking to buy a home, this doesn’t necessarily mean lower prices.
Strategists and economists from Goldman Sachs expect home price growth to stall completely, averaging 0% in 2023. Outright declines in national home prices are possible and likely in some regions. However, large declines remain unlikely.
In the second quarter of this year, home prices averaged $525,000. In the second quarter of 2021, home prices averaged $473,000 and in 2020 average cost was $374,500.
Despite the possibility of a small decline in home prices, they are expected to remain high because of inflation and the limited supply of homes. Also, the average rate for a 30-year fixed mortgage climbed to 5.66% for the first time.
Now is not a good time to buy or sell
The real estate market is in limbo, and that makes it difficult to buy or sell in the current market. Potential buyers are waiting because of increased mortgage rates and sellers aren’t enticed as price growth declines. All these factors contribute to the increasing general pessimism of the future of the housing market.
Although this downturn is not as severe as the 2008 foreclosure crisis, the future of the housing market seems bleak. Data from Fannie Mae found that consumer perceptions on home buying and selling, and expectations regarding future home prices and mortgage rates have gotten increasingly worse. This pessimism has created greater dysfunction in the real estate market.
Overall activity in the real estate market is slowing down. The rate of home sales is the slowest it has been in over six years. The slowing of sales is due in part to the rising mortgage rates.
A slowed housing market means regained leverage for buyers
Despite high prices and mortgage rate increases, new data has found that the slowing of the market allows buyers to regain some leverage when making negotiations. In August, houses were selling below asking– which hasn’t happened since March 2021.
The average sale-to-list price ratio was 99.8% during the four week period being studied in August. Last year in that same time frame, the ratio was 101.4%. Ratios above 100% indicate that, on average, homes are selling at or above asking price.
Leading up to this slow down, there was fierce competition in the home buying market. The combination of few houses on the market and rock-bottom interest rates sparked bidding wars– driving prices well above asking price.
In July, the national median home price jumped 10.8% according to the National Association of Realtors.
Housing prices expected to fall in 39% of US cities next year
Economists from Goldman Sachs expect that 39% of metropolitan areas will experience price declines. The declines are expected to take place in Western markets like Denver, Phoenix, and Los Angeles. Goldman Sachs predicts that East Coast markets like New York, Philly, and Boston should all see home prices continue to appreciate.
Is the housing problem only in the US?
The US is not the only place feeling the impact of the volatile housing market. Goldman Sachs predicts that by the end of 2023 the following markets will experience a crash:
- New Zealand (–21%)
- Australia (–18%)
- Canada (–13%)
The same researchers predict that home prices will fall 6% in France and remain unchanged in the United Kingdom. Some suggest that in the US, home prices could rise 1.8%.
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