If 2022 was a roller coaster year for the housing market, 2023 is expected to bring a painful but necessary real estate hangover.

Nationally, a growing number of experts and firms are predicting U.S. home prices will fall, some expecting slight, single-digit drops, while others expect prices to fall by double digits, perhaps even over 20%.

Keep in mind, however, that during the pandemic housing frenzy from early 2020 to late 2022, the nation’s median home price ballooned by over 41%, so even if the most pessimistic predictions pan out, they aren’t slated to erase the historic price gains seen over the last two years.

The U.S. housing market is going through what Federal Reserve Chairman Jerome Powell has called a “difficult correction” and a “reset” as it comes off the tail end of a pandemic frenzy fueled “housing bubble.” In its fight with record inflation levels throughout 2022, the Fed made a series of aggressive borrowing rate hikes, which translated to a spike in mortgage rates that priced or spooked buyers out of the market.

Even as mortgage rates in recent weeks have ticked down slightly, economists are expecting higher rates to continue to dampen sales throughout 2023. Some, however, say the market needs this correction to reach a more healthy equilibrium between sellers and buyers — as well as healthier affordability.

All of this, of course, depends on how local markets fair.

In Utah, because of its continued strong job economy, experts predict the state’s housing market to experience some turbulence in 2023 but come out strong next year.

“Hang in there. 2024 will be better,” Jim Wood, one of Utah’s leading housing experts, told the crowd gathered at the Grand America Hotel in Salt Lake City for the Salt Lake Board of Realtors’ 2023 housing forecast Friday.

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What will happen to Utah’s housing market?

Wood, the Ivory-Boyer Senior Fellow at the University of Utah’s Kem C. Gardner Policy Institute, detailed his forecast report commissioned by the Salt Lake Board of Realtors, explaining why he still feels optimistic for real estate even if 2023 won’t be a “year of celebration.”

“2023 will be tough for sales. It’s going to be tough for real estate agents. It’s going to be tough for home builders,” Wood said. He expects buyers and sellers will “step back and wait for the dust to settle,” many of them locked in at low, 3% mortgage rates that helped send the nation’s housing market into a frenzy in 2020 and 2021.

Reluctant sellers and priced-out buyers, Wood said, will mean 2023 will mark a year of slumped home sales. After seven years of Salt Lake County sales averaging 18,000 homes, the high prices of 2023 will mean sales will not top 13,000, he predicted, and likely range between 11,000 to 12,000.

Will Utah home prices drop?

The West was ground zero for the pandemic housing frenzy and has also been one of the first areas to see home listing prices getting slashed as the market corrects.

In Utah, housing prices have begun to decline, down from their peak in May, when the median sales price of Salt Lake County homes was $565,600. After the next seven months, the median price fell by 14% to $485,829, erasing month-over-month percent increases until “finally turning negative 2.1% in December,” Wood wrote in his report.

How far will they fall? Utah’s housing experts disagree over how much home prices will decline, though they remain confident that 2023 will not bring a full blown, 2007-like crash, and that Utah’s strong job economy will still largely insulate it from any negative impacts of a recession.

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Wood has a more optimistic outlook.

Utah will see minor “year-over-year price declines in the first and second quarter of 2023, but prices will begin to stabilize by the third and fourth quarter,” he said.

Wood’s research colleague at the Kem C. Gardner Institute , Dejan Eskic, is more bearish, predicting Utah home prices will drop 9% year over year in 2023. From peak-to-trough, he expects prices to decline by a percentage somewhere in the mid to low teens, depending on interest rates.

As for interest rates, Wood noted forecasts vary widely, anywhere from 5% to 9%, but he personally expects rates to bounce between 6.5% and 7.5% in 2023.

Additionally, both Wood and Eskic predict Utah’s estimated 31,000-unit housing shortage will continue to keep home prices high, even if the state sees some price drops, so they expect Utah’s housing affordability crisis to remain a persistent issue that is pricing out more than 75% of Utahns from affording the state’s median-priced home.

Is there a housing bubble?

Powell, the Fed’s chairman, has indeed called it a pandemic frenzy “housing bubble,” but he and other experts all have consistently said it’s not like 2007 and 2008.

In his report for Utah, Wood wrote it’s “very unlikely that the recent price run-up represents a housing bubble,” though he added, “We don’t know if a bubble exists until after it bursts.” He cited Alan Greenspan, an economist and past chairman of the Federal Reserve, who defined a housing bubble as a prolonged period of housing price declines.

“Such a decline is extremely unlikely in Utah” in 2023 and 2024, Wood wrote.

Wood also said “2023 is not 2008,” when it comes to housing prices, noting “very few, desperate, unemployed homeowners face foreclosure ... They can step back and wait for the dust to settle.”

As a result, Wood predicted price declines that have been tumbling since May will stabilize by the third quarter of 2023, and the annual median sales price for 2023 will likely “be within a few percentage points one way or another of 2022.”

“Worst case scenario,” Wood added, “prices down about 5%; best case scenario, prices equal to 2022.”

Will U.S. home prices drop in 2023?

Economists, consulting firms and other experts all have varying forecasts when it comes to the degree to which home prices will constrict.

“Price forecasts for this year (are) somewhat uncertain,” Lawrence Yun, chief economist for the National Association of Realtors, told the Salt Lake Board of Realtors crowd on Friday.

Yun has said the margin of price declines will likely depend on the region. High-cost areas like San Francisco, he said, will see a 15% price decline. The Midwest, he said, will likely see “minimal price increases.”

Strong job growth cities like Boise and Salt Lake City are harder to forecast, he said, as affordability issues keep first-time buyers from getting into the market.

“So it’s really tough to say, but I think it’s going to be minimal negative, or negative positive,” Yun said. “Or if it’s little more meaningful declines, a 10% decline, take advantage of those because 10 years from now you’ll see much better conditions.”

Overall, Yun has predicted U.S. home sales to fall by 6.8% in 2023 compared to 2022, and he expects home prices to increase only 0.3%, or essentially flatline.

Here are what other organizations and firms are predicting:

  • Realtor.com predicts home prices will still rise 5.4% in 2023, while mortgage rates will average 7.4%.
  • Freddie Mac forecasts U.S. home prices will drop by only a slight 0.2%, with an average mortgage rate of 6.4%.
  • Redfin predicts the median U.S. home sale price will fall 4% in 2023
  • Capital Economics predicts 2023 will be the “worst year for sales since 2011,” and expects house prices to drop 6% this year, which would result in a peak-to-trough drop of about 8% to 10%.
  • Moody’s Analytics expects a peak-to-trough U.S. home price decline of 10% — or a 15% to 20% decline if a recession hits, Fortune reported.
  • John Burns Real Estate Consulting now expects U.S. home prices to fall 20% to 22%, Fortune reported, based on the assumption that mortgage rates linger close to 6% through the year.
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2023 real estate predictions: ‘Terrible consolidation’

Glenn Kelman, CEO of Redfin, predicted on a Jan. 4 episode of Barron’s Live that the real estate market, particularly when it comes to real estate agents, will experience a painful constriction in 2023.

“There’s going to be a terrible consolidation,” he said, though he added he believes ultimately “it’ll be good for the industry.”

In 2020 and 2021, when Congress was writing COVID-19 stimulus checks, Kelman said “real estate diversified in an interesting way” because those stimulus checks “allowed people to experiment with real estate.”

But now, those days of wild buyer demand and a frenzy of seller activity is over, and real estate agents outnumber active listings.

In 2022, Redfin itself went through two rounds of layoffs. Compass announced a third round of layoffs on Thursday, according to The Real Deal.

“So I hope the industry is close to right-sized and things can get better from here,” Kelman said. “I don’t think that’s happened yet.”

Better buyer balance

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In its December 2022 monthly report, Realtor.com said its monthly housing data showed a housing market that’s continuing to cool, with the number of homes for sale up by 54.7% compared to the same time last year.

The rising inventory, coupled with listing price growth dropping below 10% for the first time in a year, “offers some positives for homebuyers,” Realtor.com stated in its report, “as they may have more options and more time to make a decision on a home purchase.”

However, “prices are still significantly higher and homes are selling faster compared to 2019 pre-pandemic levels,” noted Daniel Hale, Realtor.com’s chief economist.

“Although demand has softened compared to last year, pushing home price growth into single-digit territory for the first time in 12 months, moderation in home price growth may encourage more buyers to return to the market in the months ahead, and may also be welcome news for sellers aiming to sell and buy at the same time.”

Home sales are crashing down to reality in the West
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