Will home prices in the U.S. drop in 2023? It's a question on the minds of many home buyers, homeowners, and real estate professionals. After experiencing an unprecedented surge in house values over the past 18 months, the real estate market is now showing signs of cooling. In fact, recent reports indicate that some U.S. cities are already experiencing a decline in home prices.
House Values Are Already Starting to Dip
During the second half of 2020 and throughout 2021, U.S. home prices soared at an astonishing pace. Housing markets like Austin and Boise saw year-over-year price gains of over 30%. However, we are now witnessing a reversal of this trend in some of these previously hot markets. Sellers in Austin, for example, are slashing their prices to attract buyers, a trend that is being observed in cities across the country.
Recent reports have revealed that home prices are already dropping on a month-to-month basis. According to Zillow's research group, U.S. home values fell by 0.1% from June to July 2022, marking the first decline in the raw Zillow Home Value Index since 2012. The biggest declines were seen in overheated markets like San Jose, Phoenix, and Austin. While a decline of 0.1% might not seem significant, it could be the start of a more sustained drop, especially in markets that experienced substantial growth in the past two years.
The National Association of REALTORS® also reported some price declines, stating that the median existing-home sales price climbed 10.8% from one year ago but dropped by $10,000 from the previous month's record high.
Will Home Prices Drop in 2023, or Level Off?
Given these recent reports, it's natural to wonder if home prices will drop in 2023. While a decline in house values seems likely, it may not happen uniformly across all markets. Instead, we are likely to see a scenario where home prices fall in some housing markets while continuing to rise at a slower pace in others.
Economic research group Moody's Analytics predicts that out of 414 regional housing markets, home prices will drop in 210 markets while continuing to rise in the remaining 204. Real estate conditions vary from one metro area or region to another, with markets that experienced explosive growth in recent years being the most at risk of a downturn.
Housing Markets Most at Risk of a Downturn
According to a report from Redfin, the so-called "pandemic homebuying hotspots" are the most likely to see a drop in home prices. These metro areas experienced a surge in home-buying activity during the pandemic, which drove prices up and reduced inventory. Now, these same markets appear to be on shaky ground.
The report states that markets like Riverside, Boise, Phoenix, and Tampa are more likely to experience a decline in home prices, while more affordable Rust Belt metros like Cleveland and Buffalo are expected to be more resilient.
A cooling trend in markets such as Boise, which saw rapid price growth creating affordability issues, could actually be beneficial from a social and economic standpoint. It remains to be seen if these reports and trends will result in hesitancy among home buyers in 2023, potentially exerting further downward pressure on prices.
Disclaimer: The views and predictions in this report should be treated as educated guesses and not definitive forecasts.
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