Will next year see a collapse in American home prices, or a modest uptick? Will sales crater or hold firm? This year, professional forecasts are all over the place. 

The pessimistic camp includes luminaries like KPMG Chief Economist Diane Swonk. Her predictions include a 20 percent drop in the Case-Shiller Home Price Index.  

More moderates include economists at the National Association of Realtors, Zillow, Freddie Mac and Fannie Mae, who all expect fairly flat home values. A few optimists, like Realtor.com Chief Economist Danielle Hale, believe home prices might even rise slightly. 

So far, it seems that the moderates have the most compelling case. The Federal Reserve pledged last week to bring its benchmark interest rate to 5.25 percent by the end of 2023, potentially sending the economy into a recession. But it would seem like the nation will likely dodge a 2008-style collapse that has become everyone’s reference point for economic slowdowns.  

Reforms in the wake of that financial crisis have kept dodgy loans out of the secondary marketplace. And while the pandemic homebuying boom created a pulse of new homeowners who are at their most vulnerable point in the ownership cycle, it’s hard to see how we get another foreclosure tsunami absent a truly severe recession.  

True, these pandemic-era buyers have relatively little equity in their homes, and having bought as home prices were rapidly leaping upwards they will be underwater on their loans should prices dip. But simply being underwater on your home doesn’t require you to sell. Only a job loss would mandate that. 

The biggest danger facing New England markets appears to still be a continued lack of inventory, caused in large part by a lack of new construction over the last 30 years. With prices and mortgage rates so high that few sellers – most of whom are also buyers looking to trade up or downsize – are willing to jump into the market, the buyers who are still out there will be forced to keep bidding up home prices this spring.  

For example, CoreLogic economists predict a 5.8 percent gain in Greater Boston home prices next year, while Zillow forecasters think “modest gains” are in the cards and Realtor.com market-watchers expect a 9.5 percent jump, plus 8.9 percent and 10.6 percent price surges in the Pioneer Valley and Greater Worcester, respectively. 

With many markets having already veered dangerously into unaffordable territory, this will continue to damage everyone’s ability to afford shelter and raise the stakes even further should some exogenous event like a financial crisis cause severe job losses in the region.  

One of the best things we can do right now is to try and let the air out of this balloon with more housing production. It won’t come fast enough to relieve pressure on the 2023 market, but it will make our housing market much more structurally healthy. 

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Mixed Signals for Housing in ’23

by Banker & Tradesman time to read: 2 min