The U.S. real estate market is at near-unprecedented pricing, but that may not be the case for long. Recent data has experts projecting it will fall in the next year, which would lead to major changes for buyers, sellers, and professionals.
There are several things anyone involved in the market needs to be aware of as we reach a point of buyer prosperity or financial crisis.
Experts Predict Prices to Fall 5% by the End of Next Year
Most financial institutions predict market prices will fall by around 5% by the end of 2023. Wells Fargo predicts the decrease will be over 5%, and analyst Ivy Zelman expects prices will drop by 4% in 2023 and another 5% in 2024. Moody’s Analytics predicts a decrease of 5%-10%.
Capital Economics is a bit more pessimistic, predicting at least an 8% decrease over the next year.
As mortgage rates begin to fall, owners will start listing their homes as they purchase new properties, creating a greater balance between supply and demand.
Prices Could Fall Nearly 20%
Some experts think a more drastic change will occur over the next year, with prices falling nearly 20%.
Online real estate giant Zillow believes that by February 2023, prices will drop almost 18% from the same time in 2022. Pantheon Macroeconomics predicts that the drop will reach over 20% by the middle of 2023.
Prices will still be higher than at the beginning of 2020, representing just how drastic pricing has become over the past couple of years. The correction could burst the housing bubble and begin a recession if prices drop at this rate, which may change the course of the market.
More Houses May Come on the Market at Lower Prices
Some property owners took advantage of the increased market value over the past few years, getting a high listing price. However, this also limited the number of homes on the market.
As prices slowly drop, more buyers will be willing to put their own homes on the market because they can now afford to purchase another. Whenever there’s competition for housing, sellers will be competing to attract the right buyer, flipping the switch from recent events.
These price drops will also affect different communities, as the decrease will likely cause families to seek lower prices in the suburbs.
It Could Get Worse Before It Gets Better
At this point in the game, it’s unlikely that prices will be higher at the end of 2023, but things will likely get worse before they get better.
Many experts predict a rise in mortgage rates through the end of 2022 and the beginning of 2023 before a significant drop begins. It is less likely that properties will come onto the market if that’s the case.
Interest rates are still a problem. Even if prices plummet, increasing rates could prevent the market from falling as much as buyers hope.
Federal rate hikes mean slowing down the housing market, which, in theory, will prevent the bubble from bursting. These rates will make monthly mortgage payments more expensive, and buyers may decide to back out of a deal prematurely. According to the National Association of Realtors, home sales fell over 20% from 2021.
Recession Could Put the Market at a Standstill
A market crash could lead to another recession, which will continue to affect the market. The numerous financial consequences will create roadblocks in selling a home. Job loss and other financial strains could cause in-progress deals to fall through.
This financial crisis could put the market on hold as the country navigates the strain. Anyone beginning their home search now may depart before making their first offer. Sellers may also need to back out of deals that started before the recession hit, as their financial circumstances may require them to stay in their current homes.
The standstill will have a ripple effect on professionals in the real estate industry, with agents, appraisers, and inspectors losing business.
Recession is not as strong of a possibility as some fear. However, it is still on the table for 2023. Statista’s current outlook places the chance of recession at 23% by September of that year.
Power Should Return to the Buyer
In 2021, 51% of homes on the market sold above their listing price. This led to buyers backing out of the market since they couldn’t compete. Mortgage demand has dropped to its lowest levels since 1997.
On the other hand, sellers held the power to choose the best offer from various buyers, securing them as much money as possible without lengthy negotiations.
As prices start to drop and more homes of similar condition become available, some of that power will transfer back to the buyer. Buyers will have a greater selection, causing sellers to receive less high-priced offers. Buyers will also have the larger bargaining power to get the seller to meet multiple contingencies, such as repairs and removing unnecessary items.
Sellers will not get the number of advantages they would with the market’s current state, but they will still get a better deal for their home than they would have at the beginning of 2020.
When buyers feel empowered again, the market will return to its pre-pandemic normalcy.
It Will Take Time
Buyers or sellers reading headlines could prepare to enter the market expecting a drastic price change relatively quickly. However, this is an extremely unlikely scenario.
Real estate professionals will need to be upfront with clients about the current state and outlook of the market. Local and national markets will evolve over the next couple of years, with everyone needing to prepare for rapid changes.
Prices are decreasing as of late 2022, but significant drops will likely be seen in 2024.
Preparing for a Market Fall
Being alert and prepared is the best way for potential buyers, sellers and real estate professionals to manage the upcoming market changes. There is a lot to keep track of, so everyone involved in the housing market should prepare for a bumpy ride.