As the U.S. housing market sizzled during the pandemic, home price growth, at times, looked unstoppable.
But there’s a growing consensus among experts that home prices will not continue to rise with the same breakneck momentum of the last few years. Economists say rising mortgage rates are now causing a housing slowdown that could reverse the upward movement in home prices, or at least slow price growth down.
Between May 2020 and May 2022, U.S. home prices increased by more than 40%, according to real estate brokerage Redfin. Buyers found themselves in bidding wars and homes were selling above asking price in a matter of days. Only in the last couple months have prices started to moderate.
A big cause of the shift is that it’s an expensive time to borrow money for a home, with mortgage rates creeping toward 7%. This time last year, the average rate on a 30-year fixed-rate mortgage was just under 3%.
The increased cost of borrowing has reduced the number of buyers who can afford homes, slowing the pace of sales. However, the housing stock remains tight in many parts of the country. Homes haven’t been built and repaired fast enough to keep pace with home buying demand, and would-be sellers are thinking twice about listing their homes because they feel locked in to their current mortgages. The lack of inventory is keeping the market fairly competitive, at least for now.
Some housing economists are forecasting significant declines in home prices in the months ahead, while others expect prices to continue to move up — just at a slower clip.
Here are five expert predictions on where home prices are headed — starting with the most bearish forecasts. The text has been lightly edited:
Who he is: Chief economist at Moody’s Analytics
What he expects: Surging house prices at the start of this year have given way to house price declines, and further declines are likely through next year. National house prices, as measured by repeat sales indices, are on track to fall as much as 10% peak-to-trough, with the bottom likely by the end of next year.
His reasoning: The problem is affordability. At the currently high house prices and high and rising mortgage rates, housing is no longer affordable for potential first-time homebuyers. They are effectively locked out of the market. And existing homeowners are locked into their homes, as they can’t afford to trade their current mortgage which is at a low rate with a new mortgage at a much higher rate.
All this assumes there will not be a recession. If the economy does suffer a downturn with a meaningful increase in unemployment, the peak-to-trough house price declines will be closer to 15%.
Who she is: Chief economist at real estate brokerage Nest Seekers
What she expects: Home prices will decline, but there will be significant variation depending on the market. Some areas of the country could see double-digit price declines.
Her reasoning: I think it's tremendously difficult to be a first time homebuyer right now, and that's going to be a trend that doesn't get any better any time soon. Even collecting the downpayment needed to enter the market is very difficult in such an inflationary environment.
There will be some pullback in home prices. I think that it's much needed in terms of remedying over-speculative expectations of sellers that we've seen in the last year, where everybody thought that they could hit a new record with every single sale — that was just insane.
Real estate is very local and certain areas might see a pullback of 5%, other areas might see a pullback of 30%, and it really goes by what that geography offers beyond the basics. How are businesses being supported? Are people fully employed? Is it an area that's primarily second homes? Is it primarily cash buyers? Is there abundant growth around the area where you can see things flourishing in the coming years, or is it an area that's been trending downward even during the last two years of the hottest real estate market we've seen in our lifetimes?
So I think that different people are going to experience very different realities.
Who she is: Chief economist at Zillow
What she expects: Zillow predicts home values will rise by 1.2% through August 2023.
Her reasoning: Zillow forecasts home values to continue to fall into the winter, then begin a steady climb again next year, ultimately rising modestly over the next 12 months. Housing affordability is about as bad as it’s been in 15 years due to higher mortgage rates, and buyer demand is pulling back as a result. That’s caused home values to fall from a record high the past couple of months.
Buyers who remain in the market will have a less stressful experience than they’ve had over the past couple of years, with more time to consider their options and less chance of a bidding war. This is all part of a much-needed rebalancing into a healthier market with a more sustainable pace of growth. The torrid pace of price gains seen earlier in the pandemic aren’t likely to return, but sustained home value declines to anywhere near pre-pandemic levels is very unlikely as well.
Who she is: Deputy chief economist at title company First American
What she expects: Nationally, annual house price growth will decelerate but remain positive. In other words, nationally, while month-over-month house prices may decline, annual house price declines are not expected.
Her reasoning: The record-breaking annual house price appreciation nationwide in 2021 and early 2022 was due to a supply and demand imbalance. Pandemic-era dynamics only exacerbated this divide and further contributed to price growth.
There remains a structural and long-term national shortage in the housing market, but in some markets the pullback in demand is strong and inventory is rising faster to meet demand in the middle, resulting in a moderation of house price growth, which will likely continue to decelerate over the next year.
Who she is: Senior economist & director of forecasting at the National Association of Realtors
What she expects: Home prices will continue to decelerate in 2023. We expect home price growth to slow to a rate of 5% by the end of 2022. (Compared to prices at the end of 2021)
Her reasoning: There is a gradual deceleration of home prices. Home prices have increased year over year by less than a double-digit percentage for two straight months. While rising mortgage rates and home prices hurt affordability, many buyers are priced out of the market. Nearly 20% fewer households can afford to buy the median-priced home compared to last year.
With fewer buyers in the market, demand has cooled. In normal conditions, declining demand makes home prices drop. Nevertheless, demand for homes continues to outpace supply. Inventory may have picked up, but it isn’t enough to make home prices drop. Housing inventory will remain tight for the next couple of years, so we don’t expect a depreciation of home prices.