Where home prices in 2023 are headed in your local housing market, according to Zillow’s revised forecast

Of course, just a few weeks later, the Pandemic Housing Boom began to fizzle out. Since then, Zillow has lowered its 12-month home price outlook on every forecast. In April, Zillow revised it down to 14.9%. In May it was revised down to 11.6%. In July it was revised down to 7.8%. In August it was revised down to 2.4%. In September it was revised down to 1.2%.

This week, however, Zillow finally stopped downgrading its 12-month outlook. Over the next 12 months, Zillow now expects U.S. home values ​​to rise 1.4%.

Whenever a company like Zillow says “US housing market” or “US housing prices,” they are speaking of an aggregate view of the country. In any regional housing market—hell, any neighborhood—results can vary significantly. To better understand Zillow’s forecast, let’s look at data for regional housing markets. We’ll start by looking at what’s happened to home values ​​this summer, and then we’ll dive into Zillow’s regional forecasts.

Back in May, Mark Zandi, chief economist at Moody’s Analytics, said wealth that rising mortgage rates combined with “overvalued” home prices would drive the US housing market into a real estate correction. A housing correction is a time when the US housing market – priced in at 3% mortgage rates – would work towards equilibrium. In any market, this would result in a sharp drop in home sales. It would also, Zandi said, expose frothing markets to the risk of home price corrections.

That’s exactly what we saw this summer: Home sales plummeted across the country, and sizzling markets in the western half of the country also saw home prices plummet.

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According to Zillow, 117 regional markets (see chart above) saw home values ​​decline between May and August. Of these, 36 markets recorded a decline of more than 3%. For the most part, these markets fell into one of two camps. They’re either bustling boomtowns — like Austin (down 7.4%) and Boise (down 5.3%) — or they’re high-cost tech hubs. Sizzling markets simply saw home values ​​detach from local fundamentals. Markets like Seattle (down 3.8%) and San Francisco (down 7.8%) are particularly sensitive to interest rates. High interest rates not only deter buyers of luxury homes in San Francisco and Seattle, but also have an acute impact on employment in the technology sector.

“Across the country, affordability issues have marginalized potential buyers. Of course, this demand destruction has been more pronounced in some markets than others. Markets with the highest prices a year ago experienced a disproportionately larger drop in active demand in the 12th month that followed,” Zillow researchers write.

While 117 markets saw home values ​​fall this summer, another 779 markets saw home values ​​rise. In East Coast markets like Miami (up 4.1%) and Myrtle Beach, SC (up 4.5%), those gains were pretty strong. Put simply, this is not a uniform slowdown.

In the final three months of 2022, Zillow expects the home price correction in western property markets to continue, albeit at a milder pace. Between May and August, markets like Phoenix and Salt Lake City saw home values ​​decline by 4.4% and 7.1%, respectively. Between late September and late December (see chart above), Zillow expects home prices to fall 2% in Phoenix and flat in Salt Lake City.

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Overall, Zillow expects home values ​​to fall in 118 regional markets over the last three months of 2022. 747 markets are expected to record rising home values ​​and 29 markets to remain flat.

Heading into 2023, Zillow predicts that the home price correction will lose momentum in some markets while gaining momentum elsewhere.

In markets like Boise and Phoenix, which saw sharp home price corrections this summer, Zillow expects prices to recover somewhat in 2023: Over the next 12 months, Zillow expects home values ​​in Boise and Phoenix to rise 4.3% will increase by 1.7%.

Nationally, Zillow expects 271 markets to see falling home values ​​between September 2022 and September 2023 — while 607 markets will see rising home values ​​and 19 markets will remain flat.

Why does Zillow think the home price correction isn’t being rolled out nationwide? It amounts to a scarce supply.

“A drop in demand has pushed prices lower, but while the housing market isn’t nearly as tight as it used to be, a lack of supply for sale is providing some support for prices against further declines,” Zillow researchers write. “Active inventory for sale has risen steadily over the spring and summer, but is still nearly 40% below pre-pandemic levels.”

High mortgage rates have not only reduced homebuyers, but also sidelined some sellers. Some sellers refuse to lower their price point. While others are unwilling to give up their 2% or 3% fixed mortgage rate. Industry insiders call the phenomenon the “lock-in effect”.

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“These dynamics are unlike previous property market slowdowns that have caused prices to fall, and continued tight supply could protect the market from a significant price correction even if demand has fallen. For example, during the Great Recession, declines in home values ​​were accompanied/driven by an increase in new listings, including many distressed sales,” write Zillow researchers.

To be clear, Zillow remains on the bullish side.

A growing chorus of research firms and banks are forecasting that the sharpest drop in home prices is yet to come. These include companies such as Goldman Sachs, Wells Fargo, Morgan Stanley, Moody’s Analytics, Capital Economics, Zonda, Zelman & Associates, Fannie Mae and John Burns Real Estate Consulting.

“The longer that [mortgage] Rates remain high, we think housing will continue to feel this and have this reset mode. And the affordability reset mechanism that needs to happen right now is activated [home] Prices. And so there are many markets across the country where we are forecasting real estate prices to fall by double digits,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting wealth.

Only CoreLogic and the Mortgage Bankers Association agree with Zillow that we won’t see a year-on-year decline in U.S. home prices in 2023.

Want to keep up to date with the US housing market? Follow me on Twitter at @NewsLambert.

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