Will House Prices Decline Nationally?

A Couple of New Key Forecasts

In May, I wrote What will Happen with House Prices? In that article I presented three likely scenarios: “slow”, “stall” and “bust”. My sense was a stale was the most likely scenario, but that we could see 5% to 10% price declines nationally.

This week, Goldman Sachs economists updated their house price outlook calling for national “home price growth to stall completely” in 2023:

Our model suggests that home price growth will slow sharply in the next couple quarters (+8½% QoQ ar in Q3, +3% QoQ ar in Q4, corresponding to +14% Q4/Q4 in 2022), as the imbalance between supply and demand continues to shrink, mostly through lower demand. Thereafter, we expect home price growth to stall completely, averaging 0% in 2023. While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.

emphasis added

And yesterday, in an interview with Bilal Hafeez, Ivy Zelman, CEO of Zelman & Associates forecast national house price declines of 4% in 2023, and 5% in 2024: Ivy Zelman on the Coming US Housing Crisis (price discussion starts at around 20:00)

There are some mortgage guard rails that could mitigate nationally a severe downturn, and yet the magnitude of the decline for us - the 4% that we are expecting in 2023, and 5% in 2024 -I feel like it is a starting point … the speed of the declines makes us feel like that maybe that could be conservative. But we could see double digit price corrections [in the] hot markets.

There are some factors arguing against national price declines. First, house prices tend to be sticky downwards unless there are forced sales. And unlike during the housing bubble, lending has been reasonably solid, so we will not see a huge wave of distressed sales. Zelman noted this with her “mortgage guard rails” comment.

Also, inventory is still historically very low. Even with the recent sharp decline in demand (and further declines coming with mortgage rates back to 6%), the months-of-supply numbers are still low.

But there are also factors arguing for national price declines. First, prices appear significantly too high using real prices, and price-to-income and price-to-rent ratios. Also, the recent sharp year-over-year increase in monthly payments for the same house, will put downward pressure on house prices.

In some areas, prices are already declining. In the most recent Case-Shiller report, on a seasonally adjusted basis, prices declined in 7 of the 20 Case-Shiller cities: Seattle, San Francisco, San Diego, Portland, Los Angeles, Denver and Washington, DC.

For now, I’m sticking with “stall” as the most likely national outcome (but there will be regional price declines), however the odds of a 5% to 10% national decline have increased.

Median Prices lead Repeat Sales Prices

And a quick note on median prices leading the repeat sales indices.

Perhaps the timeliest house price report for existing homes is the monthly existing home sales report from the National Association of Realtors® (NAR). Each month the NAR reports the median prices for closed sales. Note: Median prices are distorted by the mix (repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices).

The most recent Case-Shiller Home Price report was for “June” and was a 3-month average of April, May and June closing prices. So “June” closing prices include some contracts signed in February, so there is a significant lag to this data.

But even the median price is lagged. For example, the recently released July report was mostly for contracts signed in May and June.

Here is a graph comparing the YoY change in the NAR median prices vs the Case-Shiller National Index:

The YoY change in the median price peaked at 25.2% in May 2021 and slowed to 10.8% in July (still very strong increase in YoY prices).

In general, the NAR median price leads the Case-Shiller index by 2 to 3 months, so I expect the Case-Shiller index to show significantly slower YoY growth over the next several months.

Will house prices decline nationally? Maybe. It is definitely possible. But I do think real house prices (inflation adjusted) will be under pressure for some time. See: House Price Declines: How Long for Real Prices to Recover?