Rising mortgage rates have slowed the housing market across the country and in Southern California. Sales are down, inventory is up, and many potential buyers and sellers have a simple question: will home prices go down?
Some analysts say the outlook becomes more likely as the downturn deepens, with some now adjusting their forecasts to predict lower prices next year.
Such predictions mark a change from earlier this year, when experts were more in agreement that rising mortgage rates would simply slow price appreciation. That is, prices would continue to rise, but less than they had for the past two years.
Many analysts still see this slower growth scenario as more likely. Few well-known experts – if any – are predicting price declines close to what happened during the Great Recession.
But the fact that some major forecasters are now predicting sustained price declines – something that hasn’t happened in over a decade – underscores just how rapidly the housing market is changing.
“It’s remarkable,” said Jordan Levine, chief economist at California Assn. real estate agents. “Prices will go down”
Levine said it was just over the past month that he became confident that prices would turn negative.
Two factors contributed to changing his point of view. First, he calculated the extent to which repeated spikes in mortgage rates affected purchasing power. Then he saw potential buyers withdraw in real time.
Mortgage rates started the year in the low 3% range, but had topped 4.5% at the end of March, topped 5% in April and hit nearly 6% this month, according to the closely watched mortgage survey. Freddie Mac.
For a $760,000 home, the current median price in Southern California, that means a monthly mortgage payment in early January would have been $3,493 including property tax and insurance, with a 20% down payment, according to a Redfin mortgage calculator.
In March, this payment was $506 more expensive; in April, $655 more; and last week it was nearly $1,000 higher at $4,428.
A growing number of home sellers have responded to falling demand by lowering their list prices, a first step if overall selling prices were to fall in the future.
Levine is still putting the finishing touches on a forecast that will be released in July. But for now, he expects California’s median selling price for all of 2022 to be up 9.7% from a year earlier, a sharp slowdown from the growth of almost 20% observed in 2021.
Then in 2023, he expects the Federal Reserve’s actions to fight inflation to cause a mild recession and the combination of job losses and higher rates to cause the median price to fall. down 7.1% statewide from this year, with similar declines in Southern California in particular.
Capital Economics, an international economic research firm, and John Burns Real Estate Consulting in Irvine are others that recently changed the forecast to include falling house prices in 2023.
In May, John Burns began forecasting domestic and Southern California prices would decline next year, in part because the company sees a recession as increasingly likely.
In 2023, the consultancy expects mid-single-digit declines in Los Angeles and Orange counties and mid-single-digit price declines in the Inland Empire.
The company expects prices to fall at a somewhat slower pace in 2024, both locally and nationally, before rising slightly in 2025.
Mark Zandi, chief economist at Moody’s Analytics, said prices could fall even without a recession.
If rates don’t climb “significantly above 6% for an extended period” and the economy avoids a recession, Southern California home prices should be largely stable over the next few years, although some communities that have experienced dramatic pandemic booms could see declines.
But if rates rise to about 6.25% or 6.5% and stay there, Zandi said, Southern California prices would likely fall about 5% without a recession and potentially as much as 10% with a recession.
He said the most likely scenario is fixed prices, but if he were an oddsmaker, he would say there’s a 40% chance that Southern California home prices will fall by at least minus 5% from peak to trough, compared to 25% in May.
He and other experts said house prices are extremely unlikely to crash like they did during the Great Recession.
In large part, that’s because many current owners don’t like underselling their neighbor a few months ago, which experts say will limit the price drop.
Things were different last time. Risky lending during the housing bubble of the early 2000s sparked a wave of foreclosures and sparked a financial crisis, sending Southern California prices plummeting by 50% from 2007 to 2009, according to DQNews figures.
Now, most economists think any recession would be mild. Tighter lending standards also mean those buying their homes during this boom could more than afford them and far fewer people will be forced to unload their properties, experts said.
Additionally, there is a large cohort of millennials in their early thirties looking to buy a home for the first time.
“There won’t be as many foreclosures and distressed sales, which is what you need to drive prices down,” Zandi said.