On one hand, that 2.5% drop in U.S. home prices marks the second-biggest home price correction of the post–World War II era. On the other hand, through November, it’s just a mild correction compared to the 26% peak-to-trough drop notched between 2007 and 2012.
What’s driving the ongoing housing correction? It boils down to what Fortune calls “pressurized” affordability: Last year’s three-percentage-point jump in mortgage rates combined with U.S. home prices running up 41% between March 2020 and June 2022 has simply pushed homeownership out of reach for too many buyers. Cue falling home prices.
There’s something else at play too: This time around, buyers and sellers alike know prices can fall.
“I think that the religionpeoplehad from 1946 to 2008, that housing prices always go up, is dead. My parentsbelieved that it was literally inconceivable for [home] prices to go down,” Redfin CEO Glenn Kelman told Fortune last year. However, that so-called home price “religion” got broken, Kelman says, by the 2008 crash. “So folks respond [now] to that [correction] with almost PTSD, and they pull back much more quickly.”
Let’s take a closer look at the latest Case-Shiller data.
For 124 consecutive months, from the bottom of the previous correction in February 2012 to the peak of the Pandemic Housing Boom in June 2022, the seasonally adjusted Case-Shiller National Home Price Index reported positive month-over-month home price growth. That’s been replaced by this new streak: five consecutive months of U.S. home price drops.
That said, this ongoing housing correction is hardly one-size-fits-all. In particular, it’s driven by declines in overheated Western housing markets like San Francisco (down 11.9% since its 2022 peak), Seattle (down 13.5%), Phoenix (down 7.7%), and Las Vegas (7%).
Meanwhile, markets that didn’t get as detached from fundamentals during the Pandemic Housing Boom, including New York (down 2% from its 2022 peak) and Chicago (down 0.8%), aren’t seeing as sharp a home price correction.
It’s true that the U.S. housing market slipped into a home price correction in the second half of 2022. It’s also true that the 2.5% decline is minor compared to the massive Pandemic Housing Boom gains.
Between March 2020 and June 2022, U.S. home prices soared 41.4%. Through November, those total Pandemic Housing Boom gains have only slipped to 37.9%. That’s a mild correction—not a full-blown housing crash.
The hottest debate among housing economists and analysts is whether this home price correction will fizzle out or deepen in 2023.
Firms likeCoreLogicand Zillow think the tight inventory environment will contain the home price correction going forward. Meanwhile, firms like Moody’s Analytics,Capital Economics, and Goldman Sachs believe home prices have further to falleven if home sales are nearing their respective bottom. (You can find the home price outlook from 29 of the nation’s leading real estate researchershere.)
“I expect house prices to fall almost 10% peak-to-trough. This is necessary to reestablish housing affordability, given expected weak household income growth (even without a recession) and mortgage rates that average 6.5% this year before moderating back to 5.5% by mid-decade. If mortgage rates turn out to be lower and/or household income growth stronger, then the house price declines won’t be as severe. I have revised the length of time it will take for house prices to reach their trough, which will likely be two to three years from now. Current homeowners are holding off selling, even if experiencing life events that would typically cause them to sell, hoping that mortgage rates come down and market conditions improve. But eventually they will need to sell, inventories will increase, and prices will weaken.Having said this, the current resilience in house prices suggests the adjustment in house prices will not be a serious threat to the financial system or macroeconomic problem,” the Moody’s Analytics chief economist tells Fortune.
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As an expert in real estate and housing market dynamics, I can provide valuable insights into the factors influencing the current U.S. home price correction. My extensive knowledge is grounded in a deep understanding of historical trends, economic indicators, and the intricate interplay between various elements shaping the real estate landscape.
Firstly, let's address the evidence presented in the article. The 2.5% drop in U.S. home prices is contextualized as the second-largest correction post–World War II, yet it pales in comparison to the staggering 26% decline experienced between 2007 and 2012. The driving force behind this correction, as identified by Fortune, is the "pressurized" affordability resulting from a three-percentage-point increase in mortgage rates and a substantial 41% surge in U.S. home prices from March 2020 to June 2022.
Moreover, the article emphasizes a shift in mindset among both buyers and sellers, indicating a departure from the pre-2008 belief that housing prices only ascend. Redfin CEO Glenn Kelman attributes this change to the traumatic impact of the 2008 crash, creating a more cautious market response akin to post-traumatic stress disorder (PTSD).
Analyzing the Case-Shiller data, the article reveals a significant shift from 124 months of positive month-over-month home price growth to five consecutive months of declines. This correction, however, is not uniform across the country. Overheated Western markets such as San Francisco, Seattle, Phoenix, and Las Vegas are experiencing sharper declines compared to markets like New York and Chicago, which remained closer to fundamentals during the Pandemic Housing Boom.
The critical debate among housing economists centers on the trajectory of this correction in 2023. Some, including CoreLogic and Zillow, believe that tight inventory will constrain the correction, while others like Moody’s Analytics, Capital Economics, and Goldman Sachs anticipate further price declines, even as home sales approach a bottom.
A key projection from the chief economist at Moody’s Analytics suggests a potential 10% peak-to-trough decline in house prices, driven by factors such as expected weak household income growth and mortgage rates reaching 6.5% in the near term. However, resilience in current house prices is seen as a mitigating factor, indicating that the correction may not pose a serious threat to the financial system or macroeconomic stability.
In conclusion, the current state of the U.S. housing market reflects a complex interplay of economic factors, market psychology, and historical context, with differing opinions among experts about the trajectory of the ongoing home price correction. Stay tuned for further updates on this dynamic and evolving situation.
