The real estate market may have slowed in terms of sales pace, but it's not slumping when it comes to what homes are worth. Estimated home values, in fact, continue to rise, likely putting the kibosh on any ideas that the price bubble or inventory drought will give in the near future.
A new report from Zillow, the real estate company, forecasts that home valuations will have seen a nearly 6% spike this year by 2023's end. And it expects the trend to continue with even higher home value growth predicted for 2024.
That's likely good news for current owners who would see their home equity rise, but it doesn't bode well for potential buyers to come.
What the data says
Zillow now predicts that home values will have risen by an average of 5.8% between January and the end of this year. Moreover, the company predicts that home values will increase by an average of 6.5% between July 2023 and July 2024.
This forecast, according to Zillow, is due in large part to a dearth of inventory of homes for sale. Compared to July 2019, the past month saw half as many homes on the market.
Zillow is forecasting a total of 4.2 million home sales in 2023 — a 17% decline from the year before. This lack of inventory is fueling a supply and demand crunch that has property values rising.
Mind you, Zillow's estimates — helpful as they can be — are still just estimates. The valuations made by the company are not necessarily indicative to how much a given home would actually sell for, but rather meant to give a rough idea.
Keep in mind
While Zillow's predictions take stock of the current real estate landscape, much of the near future for home sales will be dictated by the Federal Reserve. Ongoing Fed interest rate policy has been the single most influential factor on housing inventory, and will continue to be so in the near future.
The Fed's interest rate hikes, occurring monthly since March 2022 before pausing briefly this past June, have increased borrowing costs for banks. This trickles down to homebuyers and owners alike in the form of elevated mortgage rates.
Mortgage rates, now at a two-decade high, are a massive cost for buyers already beleaguered by high prices on houses. They're also a burden on owners who have much lower mortgage rates they don't want to let go of, trapping them in properties that they might otherwise sell. Thus, a vicious cycle ensues: owners don't sell to avoid taking on a higher mortgage rates; their hesitance leads to a lack of inventory; and the lack of inventory pushes home values and then prices still upward.
If the Fed eases or reverses on its rate hikes, it's likely that mortgage rates will become more favorable once again, providing owners with more incentive to sell. That would provide buyers with enough inventory to pick from so that home prices could eventually decline or at least level off.
However, the Fed likely won't hit the brakes on interest rates until it navigates still-inflated prices that plague consumers' day-to-day spending. It's anybody's guess when the central bank gives in on its rate hikes, but Zillow seems certain that it won't be for at least the next 12 months.
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