The nation’s housing market is going through a correction, not a crash.
While sales are down and mortgage rates are up, home prices are still rising because there are so few homes for sale.
And after a decade of rising prices, commercial real estate values have been dropping steadily over the past 18 months, particularly for offices. It’s going to take two to nine years for building and warehouse values to get back to 2022 levels, creating some risk for banks holding real estate debt. Another 311 banks will likely fail in the near future — equivalent to three Silicon Valley Banks, but not enough to tank the banking system.
Those are among the conclusions from more than a dozen economists and analysts speaking at a gathering of real estate journalists in Las Vegas earlier this month.
“We don’t foresee home price declines on a year-over-year basis nationally,” Selma Hepp, CoreLogic chief economist, told the National Association of Real Estate Editors conference held in Las Vegas June 6-9. “We have had a lot of volatility on prices. … But in most markets, we are basically going back to long-term trends in terms of home price appreciation.”
Hepp predicted that home prices for 2023 will be up 4% from last year.
A more conservative outlook from the National Association of Realtors projects that prices will be up 1.8% this year and 2.8% next year.
Rising prices may be good news for home sellers, but they don’t spark a chorus of hosannas from already cash-strapped buyers faced with unaffordable home values and increased mortgage payments.
The average U.S. homebuyer needs to spend almost 38% of his or her income on house payments based on June prices and mortgage rates, said Zillow Chief Economist Skylar Olsen. That’s up from 27.1% in December.
In the Los Angeles region, the typical sale would eat up 84% of an average income, up from 61% at the end of December.
Home sales remained depressed in the nation and in Southern California, creating some chaos for industry players who rely on transactions, like real estate brokers. As of April, existing home sales were down 23% nationally and by almost 38% in the L.A. metro area, Realtor figures show.
CBRE Global Chief Economist Richard Barkham predicted a “mild recession” will occur in late 2023, with the gross domestic product dropping by less than 1% next fall and winter.
Ted Jones, chief economist for Stewart Title, predicted the Federal Reserve’s plan to curb inflation will raise the unemployment rate to 5-6%, cutting 2.8 million to 3.9 million jobs.
“What’s going to happen to the housing market and the economy if you cut that many jobs?” Jones asked. “I think our economy has got 12 more months of pretty tough headwinds.”
Mortgage rates to fall
Nevertheless, most economists at the conference expect the housing outlook to improve for sellers thanks to a limited supply of new listings and easing mortgage rates.
After averaging 6.4% this year, rates for the 30-year fixed home loan will fall to 5.6% by the end of the year, averaging in the low 5% range in 2024, predicted Joel Kan, deputy chief economist for the Mortgage Bankers Association.
“This is a new normal,” said Shashank Shekhar, chief executive of San Jose, California-based InstaMortgage. Buyers are adapting to higher mortgage rates and the need to buy lower-priced homes.
Offsetting high rates is a scarcity of listings coming onto the market, now at a four-year low.
Hepp noted that 97% of U.S. mortgage debt is at 6% or lower. Of that, 80% is below 4% and 41% is below 3%.
“People feel locked in,” Hepp said. “They don’t want to give up that really comfortable, super low mortgage rate.”
The locked-in effect is worse in California, where tax considerations like Proposition 13 and capital gains taxes create a disincentive to sell, she said.
While sellers typically receive an average of 2.4 offers per home, they now are getting an average of 3.1 offers, said Jessica Lautz, NAR’s deputy chief economist.
Meanwhile, American homeowners are sitting on a mountain of untapped equity, thanks to the meteoric rise in home prices during the pandemic, when 30-year loan rates averaged 3% or less.
During the first quarter of the year, the average U.S. homeowner with a mortgage had more than $274,000 in equity — meaning their homes were worth that much more than what they owed, CoreLogic reported recently.
In Orange County, California, equity averaged $749,801; in San Francisco, equity averaged $1.044 million.
All that equity translates into more sales without a mortgage, NAR’s Lautz said. Twenty-eight percent of buyers paid cash for their homes in May, versus 25% in 2022. Because half of older boomers paid cash, boomers now outrank millennials as the biggest group of homebuyers.
With all that value over debt, foreclosures also will remain contained, said Odeta Kushi, deputy chief economist for Santa Ana-based First American Financial Corp.
“I don’t anticipate anything on the magnitude of what happened during and after the Great Recession because of all the equity that homeowners are sitting on today,’ Kushi said.
Offices not dead
Rising interest rates caused values to drop in all sectors of commercial real estate, CBRE’s Barkham said.
Industrial property values have fallen 16% in the last 1 ½ years, CBRE figure show. Retail is down 17%, apartments are down 22% and offices are down by 34%.
Office vacancy rates are at a 30-year high, prompting Barkham to predict the office sector could take up to nine years to recover.
But Barkham noted that 80% of the increase in office vacancies is in 10% of the buildings. Generally, those are smaller buildings built from 1980 to 2009 and tend to be in downtown areas or weaker submarkets with high crime rates and fewer amenities, he said.
“Office vacancy is concentrated in the worst buildings,” Barkham said.
But despite the increase in working from home, office space is not dead. According to CBRE, 77% of companies are committed to maintaining an office for creating a corporate culture and training new employees.
