Vanguard Group, one of the world's largest investment management firms, predicts a decline in US home prices for 2023. The median sales price for existing homes has already slid 9% from a record high of $413,800 in June to $375,700 in March, as reported by the National Association of Realtors (NAR). This analysis examines the factors behind this prediction and its implications for the US economy and housing market.
Factors Contributing to the Forecast
The surge in mortgage rates has played a significant role in driving down home prices. According to Freddie Mac, the 30-year fixed mortgage rate averaged 6.39% in the week through April 20, up from 5.11% a year ago. This increase is a direct result of the Federal Reserve's interest rate hikes.
Vanguard anticipates that the home price drop will persist through year-end. They predict a 5% decline in US home prices on a year-over-year average basis in the second half of 2023, citing it as an "early sign of the lagged economic effects of changing monetary policy."
Impact on the US Economy
Vanguard's forecast carries significant implications for the US economy. The report highlights that declines of more than 10% in the annualized rate of investment in housing construction and improvements have coincided with recession on all but two occasions since World War II. The exceptions were wartime periods when defense spending supported the economy.
Housing investment has witnessed declines around negative 20% in the last three quarters of 2022. Consequently, Vanguard views a mild US recession in 2023 as the most likely outcome, with the housing downturn as one contributing factor.
Prospects for a Rebound
Despite the predicted decline, Vanguard foresees a rebound in home prices by 2024-25. The lower home prices will make housing more affordable and serve as an economic stabilizer. The report highlights three key drivers of US housing activity in the coming years:
- The structural undersupply of homes since the 2008 global financial crisis
- Robust demographic trends and favorable sentiment towards homeownership
- Strong borrower fundamentals and high equity cushions
Challenges in the Housing Market
Freddie Mac's Chief Economist Sam Khater shares some of Vanguard's concerns. He states that affordable housing remains a serious issue for potential homebuyers, and unless mortgage rates drop to the mid-5% range, demand will only recover modestly.
NAR reports that existing home sales have fallen for 13 of the last 14 months, with a 2.4% drop in March compared to February. NAR Chief Economist Lawrence Yun observes a unique housing market where home sales are trying to recover but are highly sensitive to changes in mortgage rates.
Yun notes that multiple offers on starter homes are common, indicating a need for more supply to satisfy demand. He also points out the variation in price patterns across the country, with prices rising in regions with job growth and relatively affordable housing, while more expensive areas are adjusting to lower prices.
Vanguard's prediction of lower home prices in 2023 carries significant implications for the US economy and housing market. However, with the prospect of a rebound in 2024-25, it's crucial for stakeholders to monitor market developments and adapt their strategies accordingly.