Young couple buying a new house
Housing Correction of 2023 May Not Repeat History, But It Will Rhyme
Whether or not Mark Twain truly said, "History doesn't repeat itself, but it often rhymes," that sentiment certainly seems apt for today's housing market, which is (again) turning into a correction after (another) historic rise. Over the next year, we'll find out just how much of the shift in the housing market rhymes with the past, and how much is creating new history.
Key Takeaways:
- With over 85% of homeowners paying mortgage rates below 5% (and two-thirds with rates under 4%), home sales will remain muted as long as rates are elevated. More people will delay moving due to this "'lock-in effect"' until rates retreat below 5% or prices adjust accordingly.
- Local markets, which have become increasingly disconnected from local incomes, will be more likely to see price declines of 10% or more, especially if employers are successful at bringing workers back to offices four or more days per week. If there is a deep recession, pricing declines in some previously high-flying markets could exceed 20% to 25%.
- Depending on the area, renters will also be able to claw back more market power in 2023 as historically high levels of new apartments now under construction are completed. A supply glut for short-term rentals will force some owners in oversaturated markets to convert their listings to long-term rentals, adding more supply for traditional renters.
Fortunately, most economists and analysts are not too concerned about a repeat of the long slog of home prices falling nationally after the financial crisis of 2008-09. But there is certainly plenty of worry when it comes to those markets in which housing demand, prices and rents jumped to levels increasingly disconnected from local incomes.
There's also the stubborn issue of affordability constraints shutting out younger buyers, potentially making many of them renters for life in higher-priced markets. Many of them will eventually move to more affordable markets in the Midwest, South and Sunbelt states, especially if they're able to continue working from home for distant employers.
Will the Housing Market Crash in 2023?
Even in the best of times, economic predictions are dicey because so many unknowns can enter the equation. For 2023, it's hard to nail down specific predictions for the housing market is because it's not yet clear how quickly or how much the Federal Reserve can bring down inflation and borrowing costs without tanking buyer demand for everything from homes to cars.
Regardless of what the Fed does, it's important to keep in mind that even when housing demand turns negative, home prices are notoriously sticky. This is because buyers don't want to "catch a falling knife," and sellers prefer to hold on to their imagined paper gains as long as possible, limiting transactions.
With so many homeowners with mortgages enjoying record-low rates, this stickiness will likely prove even more formidable until incomes have a chance to catch up with the spike in home values. Notably, toward the beginning of the financial crisis in March 2007, when home values on the S&P Case Shiller index first began to fall year-over-year, 12 months later they had declined less than 8%. It seems unlikely they would fall more steeply than that in 2023 given such low housing inventory.
In addition, the high levels of foreclosures seen following the financial crisis are unlikely to be repeated soon. A combination of high equity, stimulus-related savings, relatively low unemployment and robust demand for rental units as an income source for owners in distress should provide much-needed support in 2023.
While foreclosures did fall sharply in mid-2022 due to strong demand and record-high prices bringing extra equity to homeowners, those twin components will not be in force during 2023. As of October 2022, while foreclosures have rebounded from their summer lows, they were still at half their pre-pandemic levels and rising slowly. Although defaults and foreclosures could spike in 2023 if job losses rise quickly and high mortgage rates limit the sales of distressed properties to new buyers, both lenders and mortgage servicers are much more likely to work with borrowers to avoid foreclosures than they might have been prior to the pandemic.
National Housing Market Predictions for 2023
While it's certainly too soon to know how permanent major changes such as remote work will be, there are still plenty of the usual supply, demand and affordability factors that will play out in 2023.
The following is a summary for 2021, a year-end forecast for 2022 and some predictions for the housing market in 2023. These predictions assume a relatively shallow recession that stops and starts in 2023. However, should the country avoid a recession or enter a deeper and longer downturn, these predictions would change accordingly.
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