Bleak Outlook For Housing Prices Predicted For All Of 2023


The director of the AEI Housing Center at the American Enterprise Institute painted a bleak picture for the rest of this year and all of 2023 earlier this month during a presentation and forecasting of home prices in the United States.

AEI Senior Fellow and Director of the AEI Housing Center Edward Pinto pointed to some major factors colliding at once that will be harming market prices, appreciation of owned homes, and the consumer ability to buy or upgrade a home at all.

Those factors are inflation, which is at a 40-year-high, the Fed Fund rate continuously being raised to cool inflation, a housing shortage, and employment repercussions of the pandemic.

First, the volume of homes being built is not meeting the demands of those looking for or even needing to buy.

“Volume of housing continues to decline,” Pinto said. “This is expected to continue to decline. This is expected to continue through December.”

The impacts of the shortage are backed up by Elizabeth Rose, a certified mortgage planner with American Home Lending USA in Dallas, Texas.

“I think it’s really unfortunate that there is just not much in the way of homes available for the first-time homebuyer,” Rose said. “There is not much in the way of affordable homes available, and I don’t know that there is a cure for that. Especially when we are relying on materials we can’t get. We’ve got all sorts of supply issues and transportation issues.”

Pinto went on to say the Purchase Rate Lock Volume is down and is at 2018 volume levels.

Those at his Washingon, D.C., public policy think tank believe these volumes will sink even further due to higher interest rates and will likely decline very sharply in 2023.

“With record high rates of 6.99% in the last week of October, then a jump to 7.08%, volume was down 42% from 2021, 30% from 2019, and 18% from 2018,” Pinto said.

Pinto blamed those figures, in part, on the government infusing the economy with cash combined with keeping the Fed Fund rate low for far too long.

“The Fed spiked the monetary punch bowl for too long with the housing market experiencing a boom,” Pinto said. “Now we are in the midst of the most rapid slowdown in the Housing Price Appreciation since the bust of 2007 through 2011. Cash-out volume continues to decline. CO volume is down 82% from 2021, 66% from 2019, and 40% from 2018. No Cash-Out Refinancing is also hitting its lowest level of the 2019-2022 period. With rates rising past 4.24 points since January 2021, this has caused burnout. Currently, volume in 2022 is down 94% from the same time in 2021.”

Pinto is optimistic about other portions of the U.S. economy.

“Credit and debit card spending has remained strong through 2022,” said Pinto. “Spending, even on an inflation-adjusted basis, continues to stay positive, notwithstanding substantial inflation.”

Pinto further delved into why AEI concludes these are a positive, at least for now.

“Growth was most evident in the third week of October,” Pinto said. “The Wall Street Journal reports household savings and stock savings did improve over the course of 2021 and 2022. Peaking in late 2021, but since has been steadily working it’s way down. AEI attributes the decline on increasing inflation and the cost of living, as well as the trimming of luxuries.”

In some sectors, those in the U.S. are saving money, but figures reflect traditional trends in tiers.

“There is still an excess of $1 trillion in savings,” said Pinto. “Savings on the high end is substantial. Middle continues to break even, and low-income households continue to decline. All three quantiles are consistent with inflation running hot. “

Pinto said it is going to take better than a year and maybe close to two to really see the effects of efforts to cool inflation.

“This helps explain why inflation has been running hot. This demand/pull inflation that has been created from the wealth effect the Fed created with stock prices, which even though are down, they are still up substantially from late 2019. Even though home prices have peaked and started to decline somewhat, we expect larger declines,” Pinto said.

Pinto went on to explain why recovery is projected to be slow.

“It will take time for consumer price inflation to come back under control because demand deconstruction takes time. The Fed’s tool here is interest rates. It also takes time for the housing and rent component of the Consumer Price Index to show effects. It is about 30% of the Consumer Price Index, but lags about 12-to-15 months to cycle through. All of those factors combined says it is going to take time,” Pinto said.

Pinto continued to point at the federal government for causing a problem and then delaying fixing it.

“There is going to have to be the demand deconstruction,” Pinto said. “The Fed is trying to engineer it after it, of course, created the problem with spending for stimulus, but the Fed contributed trillions and trillions of dollars both in the stock market and in the housing market. By buying mortgage-backed securities and treasury securities for way too long, they built up a portfolio of $9 trillion and have been letting that run off very, very slowly.”

Pinto said travel and energy costs are impacting how quickly recovery can happen.

“Gasoline prices have retreated from peak levels, but the gallons of gasoline purchases are down 2 to 4%. With the lowest quintile down more than any other quintile.” Pinto said. “Again, we are seeing the effects of inflation. It is going to impact the lowest income quintile the most. Inflation is a regression tax, it affects the lower-income quintiles more than other quintiles. We see a change in non-essential spending following the same pattern with the lower quintile having the biggest changes.”

Home prices through 2023 are projected to keep going down.

“With house price appreciation through September 2022, we are seeing prices decline in all price tiers, but we are seeing the biggest declines in the high-priced tier,” said Pinto. “Mid-High and High-priced tiers are more dependent on the Fed’s monetary punchbowl. Now it’s hangover time. They are showing the largest declines as the Fed hikes rates.”

AEI expects by December 2023, home prices will have declined by 10% to 15%.

“Metro areas are beginning to see large declines in Year-Over-Year Home Price Appreciation,” Pinto said. “Normal home prices on a Year-Over-Year basis are starting to decline almost everywhere, except in the Florida metros of Cape Coral, North Port, Deltona, Miami, Orlando, Palm Bay, and Tampa. Also the Texas metros of Austin, Dallas, Houston, and San Antonio. These are attractive for home buyers looking to take advantage of working from home.”

Lawrence Yun, chief economist at the National Association of Realtors, said earlier this month that because of the severely limited housing inventory, large home price drops likely won’t happen in most of the country.

In 2023, Yun expects home sales to decline by 7%, while the national median home price will increase by 1%, with some markets experiencing price gains and others experiencing price declines.

Yun also projects a strong rebound for housing in 2024, with a 10% jump in home sales and a 5% increase in the national median home price.

The next AEI briefing is scheduled for Nov. 29.

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