Friends have been asking me how much I think real estate prices will decline. As with all predictions, it depends on who you ask.
Goldman Sachs economists updated their house price outlook to call for home price growth to stall completely in 2023. Their model suggests that home price growth will be about 3% in the fourth quarter of 2023 as the imbalance between supply and demand continues to shrink. Thereafter, they expect home price growth to stall completely, averaging 0% in 2023. They believe that outright declines in home prices are possible nationally and appear quite likely for some regions. They also believe that large declines seem unlikely.
A slightly more negative prediction comes from Ivy Zelman, CEO of Zelman & Associates. She forecasts national house price declines of 4% in 2023, and 5% in 2024.
Bill McBride, who earlier this year thought that inventory was too low for price corrections, has more recently written that there are three possible scenarios: that the market will slow, stall, or bust. He believes that there are some factors arguing against national price declines. He believes that we aren’t going to see as many foreclosures as we did after the last housing bubble as lending has been more solid. He also believes that inventory is still historically very low even with the recent sharp decline in demand, and with further declines in demand coming as mortgage rates are back to 6%.
On the other hand, he believes that there are some factors arguing FOR national price declines. Prices appear too high using real prices, price-to-income ratios, and price-to-rent ratios. I agree with him here. Cap rates are terribly low considering the risk and increasing entitlement attitude of tenants.
In the most recent Case-Shiller report, prices declined in Seattle, San Francisco, San Diego, Portland, Los Angeles, Denver, and Washington DC. 7 out of 20 of the cities they follow.
Bill McBride is sticking with stalling as the most likely national outcome, with some regional price declines. However, he believes that the odds of a 5% to 10% national decline have increased. After adjusting for inflation, house prices will likely be under pressure for quite some time, according to McBride.