U.S. housing market avoids crash, but challenges remain for buyers and sellers
- Home values are forecasted to continue growing in line with pre-pandemic norms, indicating market stabilization
- Low mortgage rates and remote work have fueled demand, leading to a competitive and costly market for buyers
- Supply shortage persists as existing homeowners opt to stay put due to higher mortgage rates, leading to a decline in supply
- Zillow expects 5.5% growth in home values in 2023, indicating resilience and recovery in the housing market
- None.
- Home values are rising at pre-pandemic rates nationally and are forecast to stay the course.
- Buyers still have few choices, but builders are adapting to help fill the gap.
- A new survey shows rising numbers of homeowners intend to sell.
Sellers continue to sit on the sidelines, holding on to low mortgage rates. And while rates could tick down over time, the issue of affordability, which has grown worse over the past few years, is unlikely to significantly improve.
"The housing market is stabilizing after the turbulence of the pandemic, but the effects will be with us for a long time," said Zillow senior economist Jeff Tucker. "Price appreciation is back to normal after a short reset, but that means buyers still face serious cost challenges and competition, especially for the most affordable houses and in less expensive markets."
Record-setting home value growth during the pandemic was largely supported by market fundamentals. Home-buying demand spiked because many households had not yet been able to strike out on their own after years of underbuilding during the Great Recession, and the huge millennial generation had entered prime home-buying age. Ultra low mortgage rates, combined with the pandemic-spurred boom in remote work, added fuel to the fire.
Demand cooled as mortgage rates doubled over the course of 2022 to the upper
While Zillow's economists were confident that fundamentals would keep prices resilient, the sheer force of the pandemic housing boom caused others to project an equally painful comedown to follow. Those projections have not come to pass. At the start of this year, Zillow's forecast for 2023 home values called for a
Home values fell in the second half of last year, but the same low mortgage rates that supercharged pandemic demand for purchases and refinances also put a floor under how far home values could fall. Existing homeowners have largely chosen to stay put rather than purchase another home with a much higher mortgage rate, which would cost hundreds of dollars more each month.
The resulting decline in supply has been more significant than the pullback in demand. Mortgage rates could tick down in the long term if inflation continues to recede, but they almost certainly won't return to the historic lows seen during the pandemic.
For those still working to save up for a home, the record-breaking rise in prices and subsequent surge in mortgage rates effectively doubled the cost of a mortgage. At
Competition for the few homes listed is high, and home values have once again been growing at a roughly normal pace historically. Cost pressures and a lack of choices for buyers have dragged down sales. Zillow forecasts 4.2 million existing home sales in 2023, which would be the lowest level since 2010.
New construction is helping fill the gap
Recognizing the opportunity, home builders have accelerated activity in recent months after a sluggish end to 2022 and an equally sluggish beginning to 2023.
Builders are changing tactics to confront cost pressures that high interest rates have laid on both them and their customers, with detached single-family homes giving way to more economical options. Builders are also more likely than homeowners to offer attractive financial incentives to buyers, including mortgage rate buydowns. Availability and flexibility are paying off: Sales of new builds are up
Rent growth is 'perfectly average'
Renters who have dealt with massive price hikes and volatile markets should appreciate a return to normal growth as well. Tucker called rent growth "perfectly average" in Zillow's latest rent report, posting
Rent growth stalled at the outset of the pandemic, then soared to a record-high peak of
Now, the cooldown in rent inflation is finally underway. As predicted by Zillow economists, rent inflation measured in the Consumer Price Index lagged behind market rent measures like Zillow Observed Rent Index by about 12 months and is ticking down.
What's next for prospective buyers?
There are a few potential bright spots for buyers on the horizon as we head toward the fall. Competition and price growth are both easing up as they typically do at this time of year, while more normal, predictable growth in rents and home prices will make it easier for those considering new mortgages to budget and plan.
More existing homes could be on their way. In a new Zillow survey,
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SOURCE Zillow
FAQ
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