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Don't Expect Home Prices to Fall in 2023, Warns Zillow Economist

Sep 08, 2023Sep 08, 2023

Home prices in the US just posted their first annual decline — by a minuscule 0.2% — in more than a decade. Some bearish pundits and real-estate investors are taking it as a sign of more dire drops to come, predicting a bubble burst or even a crash.

But don't expect home prices to drop much farther in most areas, Skylar Olsen, the chief economist at the real-estate marketplace Zillow, told Insider reporters in a roundtable discussion.

It boils down to a lack of inventory, she added: The number of homes for sale is still too low.

"We can't promise that home prices will continue to fall because the inventory is not there to allow that to happen," Olsen said. "I really don't know where the inventory comes from to help prices come down."

Sure, higher mortgage rates are dampening buyer demand. And yes, new-home sales fell by 19% year-over-year in February, and fear of an economic recession is likely to deter more Americans from purchasing homes.

But even demand from a decreased number of buyers will buoy prices if there aren't any houses on the market to choose from.

And higher mortgage rates prevent homeowners from wanting to move and sell. Prospective buyers are still competing for the few homes that are for sale.

The United States has long endured a housing shortage.

But rock-bottom interest rates lured millions of Americans to purchase homes between 2020 and 2022, forcing intense competition and bidding wars for a limited number of homes for sale and worsening the situation.

That frenzy of demand pushed up home prices by 18.8% in 2021 and by 5.8% in 2022, according to the S&P CoreLogic Case-Shiller Index.

Though home prices have dropped since their 2022 highs — especially in pandemic boomtowns like Austin, Texas; Boise, Idaho, and Phoenix — they remain far above pre-pandemic levels.

Olsen said they'll likely stay there.

In 2008, foreclosed homes flooded onto the market and prices fell. But that glut of supply is unlikely to occur this time around.

The gap between single-family-home constructions and the number of households formed grew to 6.5 million homes in 2022, according to Data from the National Association of Realtors shows that as of January, existing inventory stood at a 2.9-month supply. That's below the five to six months of inventory that experts recommend for a balanced real-estate market.

Housing supply is low due to pullback in new-home construction and the fact that homeowners with low locked-in mortgage rates are unwilling to trade them in for higher monthly payments. These payments would be required if they were to sell and move.

Both factors have significantly cooled down housing activity — but have yet to trigger the type of downturn that leads to dramatic price cuts or a wave of foreclosures in the real-estate market.

Instead, it's given rise to more sellers and homebuilders offering concessions, such as money for home repairs or mortgage-rate buydowns, a technique where a seller pays a fee at closing to secure a lower mortgage rate for a buyer.

Those who can still afford home purchases are snatching up available inventory, especially as mortgage rates trend lower by the week.

Heightened demand and increased competition will likely keep home prices high and housing affordability low.

"A big part of how we can achieve affordability is building more homes," Olsen said.

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