HousingWire

Home-price growth will moderate, even decline in some supercharged markets, industry economists project.

Rising interest rates and a slowing economy overall are already taking some of the air out of the rapid home-price appreciation the housing market has experienced over the past year, according to the recently released Federal Reserve Beige Book for July.

Several leading housing-market economists also are projecting the deceleration in home prices will continue in the near future as homebuyer demand ebbs — with one economist even predicting that prices will decline in some particularly hot markets across the nation.

“Housing demand weakened noticeably as growing concerns about affordability contributed to non-seasonal declines in sales, resulting in a slight increase in inventory and more moderate price appreciation,” states the Federal Reserve’s most recently released Beige Book report — based on data and reports current as of mid-July.

The Beige Book reports, published eight times a year, are based on interviews with bank directors, business and community organization leaders, economists, market experts and other sources. 

Fannie Mae’s Economic and Strategic Research Group also released a recent report that projects year-over-year growth in home-price appreciation for 2022 will reach 16%. Much of that appreciation is front-loaded, however, with outlook for the months ahead not so bullish. The Fannie Mae report projects “strong deceleration in home-price growth going forward” due to higher mortgage rates and the overall slowing economy affecting purchase demand.

“With inflation running well above the target rate, the market’s expectation that further, substantial monetary tightening is needed has driven interest rates even higher, and interest rate-sensitive sectors, including housing, are slowing in response,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “Homes listed for sale are increasingly seeing asking-price reductions, and both construction and home sales — both existing and new — are slowing.”

Freddie Mac, in a quarterly forecast report issued by its chief economist, Sam Khater, also projects that homebuyer demand will moderate in the months ahead, resulting in a switch from “the hot housing market of the last two year to a more normal pace of activity.”

“The Federal Reserve’s action to help manage inflation [by raising rates] has created significant volatility in mortgage rates and, by extension, the housing market,” Khater said. “Although house-price appreciation will grow at a more moderate rate, home prices [still] remain high relative to homebuyer incomes. 

“Taken together, these factors are exacerbating affordability challenges and causing a slowdown in the housing market.”

Freddie Mac projects that home-price growth will average 12.8% in 2022 but will drop to 4% in 2023. By comparison, home-price growth was 17.8% in 2021, Freddie Mac reports.

“Overall, annual mortgage origination levels are expected to be $2.8 trillion in 2022 and $2.3 trillion 2023, down from $4.8 trillion in 2021,” the agency’s quarterly forecast states.

Mark Zandi, chief economist for Moody’s Analytics, during a webinar late last week sponsored by mortgage-analytics firm Recursion, also offered a sober outlook for home-price growth. Zandi stresses, however, that despite the headwinds, we are unlikely to see a housing-market meltdown like that experienced during the global financial crisis some 15 years ago.

“We calculate that over 80% of metro areas are meaningfully overvalued,” Zandi said during the Recursion webinar. “… First-time homebuyers are locked out because they just simply can’t afford to buy … and trade-up buyers are locked in [with interest rates well below current market levels].

“So, home sales have really gotten completely hammered,” Zandi said. “Inventories are rising across the country. They’re still low by historical standards, but I suspect that’s going to change pretty quickly, particularly in the most juiced markets.”

Zandi adds that those dynamics, coupled with analysis of other data, suggest strongly that the housing market is going to experience a correction in prices.

“The market is going to go into correction,” he said. “I don’t think, however, it’s going to crash for several reasons.”

The reasons it will avoid a crash, according to Zandi, are that overall housing-inventory levels remain relatively tight by historical measures; mortgages overall have and continue to benefit from solid underwriting and oversight; and we are not seeing the kind of speculation that marked the housing market in the run-up to the 2006/07 crash.

“I don’t think national housing prices will decline in a meaningful way,” Zandi said. “But there will be some price declines across the country.

“The worst price declines [are projected to] be close to double digits — [near] 10% peak to trough — [in places like a] Phoenix, or Tampa. Although in the grand scheme of things, those also are markets where prices were up 30% this past year and 30% the previous year, so you’re only giving back a bit of a bit of what was been gained over the past few years.”

Julia Coronado, president and founder of housing-market research firm MacroPolicy Perspectives, stressed that homebuyers and consumers generally are not as highly leverage in terms of debt, compared to the era of the prior housing-market crash some 15 years ago. That, she explained, will help moderate the impact of any housing-price decline going forward.