Up from here? The free fall in housing market demand just concluded, says Capital Economics


Not only did spiking mortgage rates prompt the Pandemic Housing Boom to fizzle out in the summer of 2022, they also pushed housing market transactions into free-fall mode. By December, mortgage purchase applications were down over 40% on a year-over-year basis.

But there might finally be some good news for builders and agents: Researchers at Capital Economics believe housing market activity is bottoming out.

“There are growing signs that housing market activity may be close to a trough. The decline in mortgage rates over the past couple of months has led to a small improvement in affordability and a rise in homebuyer sentiment, albeit from a record low. Corroborating this, mortgage applications for home purchase have ticked higher in the past couple of months, which should feed through to higher sales,” writes Sam Hall, property economist at Capital Economics.

It isn’t just Capital Economics. There’s a growing optimism among brokers and agents across the country. They’re hoping that loosening financial conditions, which saw the average 30-year fixed mortgage rate fall from 7.37% to 6.09% over the past two months, will help to give the looming spring season a little juice.

Let’s be clear: Even if housing market activity (i.e. home sales) has indeed bottomed out, it doesn’t guarantee that home sales will have a swift recovery. After all, housing affordability remains “pressurized” to a historic degree. That will happen when U.S. home prices soar 41% in just over two years and mortgage rates spike from 3% to over 6% in just a 12-month span.

“But any recovery in housing market activity this year will be tepid. Stretched affordability, a weakening economy, and falling house prices will all weigh on activity. As a result, we expect 2023 will be the weakest year for sales since 2011 and for starts since 2014,” write Capital Economics researchers.

Just because U.S. home sales might be nearing a bottom doesn’t mean we should also pencil in the bottom for U.S. home prices.

“Affordability will remain stretched,” write Capital Economics researchers. “We think house prices will need to fall by a further 6% or 7% to bring affordability back to a level that will support more normal levels of demand.”

Through October, the Case-Shiller National Home Price Index has U.S. home prices down 2.4% from the June 2022 peak. In 2023, Capital Economics expects U.S. home prices to fall 6% while the average 30-year mortgage rate slips to 5.75% by year-end. Peak to trough, Capital Economics expects U.S. home prices to fall between 8% and 10%

Moody’s Analytics chief economist Mark Zandi also thinks U.S. home sales are nearing their bottom while national home prices have further to fall.

“Housing demand [home sales] is close to a trough; housing supply [housing starts and completions] has yet to hit bottom; and [U.S.] house prices have a way to go before reaching their nadir,” Zandi tells Fortune.

Peak to trough, Zandi expects U.S. home prices to fall 10%—with “overvalued” housing markets out West getting hit the hardest.

Let’s say Capital Economics and Moody’s are right and national home prices fall 10% from peak to trough. If that occurs, home prices as measured by Case-Shiller would slide back to October 2021 levels. On one hand, that would mark the second-biggest home price correction of the post-WWII era. On the other hand, it would be relatively tame compared to the 26% nationwide home price correction seen between the housing bubble’s top in 2007 and the housing crash’s bottom in 2012.