Up and down arrows reflecting the possible direction of home prices in 2023.
Illustration by Lanette Behiry/Real Estate News

Where are home prices heading? Economists are split 

With so many factors pushing and pulling on the economy right now, there is little consensus on whether prices will rise or fall in the coming year.

May 31, 2023
4 minutes

Key points:

  • Researchers for Freddie Mac and Fannie Mae are expecting price drops in 2023 and 2024.
  • Low inventory and still solid job numbers have others predicting home prices will continue to rise.
  • Prices may come down to align with incomes, but they won't crash, says economist Ali Wolf.

Crystal balls may be in short supply, but that hasn't stopped economists from offering up their share of housing market predictions. Forecasts around home appreciation are split, with researchers for the federal government taking an especially cautious, bearish stance.

Freddie Mac and Fannie Mae recently released updated reports on the housing market. Freddie Mac is expecting home prices to fall 2.9% through the end of the first quarter of 2024 and then drop another 1.3% in the subsequent 12 months. Fannie Mae is forecasting a home price drop of 1.2% in 2023 and 2.2% in 2024.

In its report, Freddie Mac still expects employment to weaken, contributing to the drop in home prices.

"Our view is based on an economy that slows and sees a modest uptick in unemployment, while inflation continues to moderate. In this scenario, long-term interest rates move largely sideways, staying in a range similar to where rates are today, perhaps moving up or down by around half a percentage point," according to the report, which was put together by a team of researchers.

If the economy is able to avoid a recession, Freddie Mac doesn't expect a spike in distressed property sales. And if interest rates stabilize, home sales will start rising, although it will likely take several years to reach 2021 volumes, according to the report.

Fannie Mae's Economic and Strategic Research Group is forecasting a mild recession in the second half of 2023, but home sales will keep it from falling deeper.

"Housing remains exhibit number one for why we expect the recession to be modest," said Doug Duncan, chief economist at Fannie Mae. "It continues to outperform our expectations, and we expect that its relative strength will help kickstart the economy into expanding again in 2024."

Zillow, Realtor.com predict rising prices in 2023

Not all economists are predicting a down year, however. Zillow, for one, is much more bullish, recently forecasting a 4.8% increase in home values between April 2023 and April 2024. Realtor.com presented an even rosier outlook in its end-of-year forecast, suggesting that home prices would rise 5.4% in 2023.

In Zillow's April report, economist Jeff Tucker said the data suggests many areas will continue to be sellers markets because inventory remains so low. The company is also forecasting that mortgage rates will ease up more than they originally expected later this year. That will drive down inventory, leading to rising home values.

Plenty of outcomes still on the table — but a crash isn't one of them

In a recent post for HomeBuilder, Zonda Chief Economist Ali Wolf suggested there could be a wide range of possible outcomes over the next year due to multiple factors putting upward and downward pressure on home prices.

Homeowners' locked-in low interest rates, low inventory and a strong job market could send home prices higher, while a recession, rising inventory and affordability woes could send them lower.

"Tracking metrics on the economy, inventory and confidence will help provide real-time information of how the market evolves," Wolf said. 

What Wolf doesn't expect to see is a collapse in home prices, because so many homeowners have a mortgage rate that's below 5%, which will keep inventory low. She also noted that the makeup of borrowers is different compared to 2009, the last time home prices collapsed, because of tighter credit standards. And unlike during the Great Recession, most current homeowners are equity-rich.

Demographics is another consideration, said Wolf.

"We have the largest share of the largest living generation — millennials — in their peak homebuying years," Wolf said in an email, adding that the one caveat is housing affordability.

Wolf does expect home prices to come down to better align with incomes, "but 'coming down' is different than a 'crash,'" she said.

Employment and the economy in the coming months may determine what happens next. Wolf said history shows that home prices often, but not always, go down when the unemployment rate rises. It's possible, Wolf said, that home prices could actually go up if the job losses from a recession are concentrated in one or two job sectors.

If unemployment is more widespread, then it may finally push home prices down.

"Job losses spread across the economy lasting more than a few months could result in some forced selling, which could put downward pressure on pricing," Wolf said.

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