Real Estate July 24, 2023

Understanding conflicting predictions

Matthew Gardener is the chief economist at Windermere Real Estate, where he analyzes and interprets economic data and its impact on national and local real estate markets. He is also a member of several economic advisory boards and a lecturer at the University of Washington. The views expressed in this column are solely those of the author. 


During the five years leading up to the pandemic, U.S. home prices were rising at an average rate of 5.5% per year. However, as we all know, Covid-19 led the Federal Reserve to start on a massive treasury and mortgage-backed securities buying spree, which ultimately caused mortgage rates to plunge and home prices to soar.

In early 2022, however, the music stopped when Fed Chair Powell announced an end to this buying spree, and mortgage rates quickly began to rise. Starting in June of that same year, prices responded and began to fall with a peak-to-trough decline of over 12.5%.

Naturally, economists and other prognosticators started to offer their thoughts on where the market would be headed in 2023 and, unsurprisingly, there was very little consensus.

A price correction isn’t likely this year

In early 2023, Redfin predicted that prices would fall 4% by year’s end, Wells Fargo anticipated a 5.5% correction, CoreLogic forecasted a 3% increase, and Zillow stated that they thought prices would be “essentially flat.”

Fast forward to today, Wells Fargo now expects prices to rise by 1.6% over the next 12 months, CoreLogic revised their forecast to an increase of 4.6%, and Zillow is now predicting prices to rise by 5% this year.

Confused? You should be!

Although a significant price correction would help improve housing affordability and benefit many home buyers who have become priced out of the market, I am afraid that this is unlikely.

We have seen home prices rise every month so far this year, which is somewhat counterintuitive given the significant increase in mortgage rates, but it happened nevertheless.

As we move through the remainder of the year, I expect prices to continue ticking higher, which is good news for homeowners but bad news for buyers who were hoping homes would become more affordable in 2023.

Price drops dependent on inventory; inventory dependent on mortgage rates

So, what would it take for home prices to drop significantly? The answer is a lot more homes coming to market. Unfortunately, this is unlikely thanks to the very same thing that caused prices to rise so significantly: mortgage rates.

Today, 61% of homeowners have a mortgage rate below 4%. Furthermore, 81% of all mortgaged homes have a rate below 5%. For these homeowners, there is little incentive to sell if they do not have to.

Rates could level out around 5% in 2024

Ironically, it’s the lack of homes on the market that is supporting home values, and unless inventory increases significantly, the price correction that the country has experienced will be over.

Looking forward, it is still my expectation that mortgage rates will start to trend lower in the second half of this year — but not to a level that will cause more sellers to put their homes on the market. As a result, prices will continue notching higher.

Mortgage rates will be the ultimate driver of the inventory we so desperately need, but until they are solidly in the 5% range, I don’t expect much to change – and that probably won’t happen until the second half of 2024.

Buyers — and real estate agents — are going to have a tough time for the balance of the year, but hope is on the horizon, just as long as mortgage rates start behaving.