Is this the second biggest housing decline ever? I don’t know. We keep hearing, “Wait for a crash. Wait for 2023 or 2024” and a lot of people are super bearish. Even Wall Street has jumped into this, saying, “Hey, this is going to be bigger than we thought.”
It all comes down to one thing, though: what are the interest rates right now? They are in the 7% range! We kind of saw where they were heading, right?
If mortgage rates stay in the sevens, then we may be in for a treat. If they do decline or go the other way, we will probably see a lot less damage in the housing market.
I have this well-written and well-rounded article from Fortune that I want to share with you because I like to base everything I talk about on facts. However, facts are still arbitrary in some cases. It depends on who’s reporting it because there is a lot of bias behind certain facts and how we interpret them. So, pay attention to the details. We do know two things: we have an affordability issue, and nobody knows for sure what is going to happen—we are all kind of living day by day right now.
Let’s dive right into it.
The article is titled “Wall Street: U.S. housing market to see the second-biggest home price decline since the Great Depression.”
“That history—or lack of history—is why recent outlooks published by Wall Street titans are raising eyebrows. Not only is there a building consensus on Wall Street that we’ve entered into a period of falling home prices, but there’s also a consensus it will be the second-sharpest home price decline since the Great Depression,” Fortune says.
The article proceeds to break down what three Wall Street companies are saying about the future of the housing market and the coming home price declines.
Morgan Stanley predicts US home prices will fall 7%.
According to Fortune, “Last week, Morgan Stanley finally joined the housing bear crowd. Heading forward, the investment bank now expects U.S. home prices to fall 7% by the end of 2023.”
When we look at it as a whole, and we try to understand “what does a housing crash look like?” it is typically a 20% decline in home prices. Morgan Stanley says we will be at more or less 7%, and this is why they are calling it a price correction. Not a crash.
This is a forecast, and they don’t know if it is going to be a deeper decline or if it isn’t going to be as bad as they are saying. The interest rates are still changing—it is all an affordability issue right now.
“Keep in mind that a 7% decline is Morgan Stanley’s ‘base case’ forecast. The investment bank also issued a ‘bull case’ and a ‘bear case.’ If mortgage rates come back down to earth by next spring (i.e., Morgan Stanley’s bull case), U.S. home prices could climb 5% in 2023. Conversely, if the country slips into a recession (i.e., Morgan Stanley’s bear case), the national home price decline could exceed 10%,” Fortune adds.
If home prices do climb, as in their bull case, is it going to beat inflation? What they are saying is, if mortgage rates go down, things could look a lot better for the housing market in that case.
If we go into a recession, which some people are saying we are already in a recession, Morgan Stanley’s bear case scenario still doesn’t exceed 20% — the home price decline, indicating we are in a housing crash.
Goldman Sachs forecasts a home price decline of around 5% to 10%.
Fortune writes: “As weakening housing data trickled in this summer, Goldman Sachs affirmed its positive home price outlook for 2023. Well, that was until it caved last week. …Peak-to-trough, Goldman Sachs now expects U.S. home prices to fall 5% to 10%. That’s a sharp downward revision from last month, when the investment bank predicted that U.S. home prices would rise 1.8% in 2023.”
This boils down to mortgage rates and affordability. If the rates do come down to the 5% range sometime this year, these forecasts will change yet again.
Moody’s has similar forecasts to Goldman Sachs, which is: US home prices will fall 5% to 10%.
The reason? Fortune says, “Good mortgage underwriting. Plain vanilla lending. Record low vacancy rate. That’s why Moody’s chief economist Mark Zandi says we aren’t heading for a 2008-style housing crash. However, Zandi says improved lending practices and tight housing supply won’t be enough to prevent the ongoing home price correction.”
We might be getting a home price correction, but our current situation prevents a housing crash like what we experienced in 2008.
Fortune adds, “Peak-to-trough, Moody’s Analytics expects U.S. home prices to fall 5% to 10% even if a recession doesn’t come to pass. If the country slips into an economic downturn, Moody’s Analytics predicts U.S. home prices will fall by 10% to 15%. Either way, Zandi says, it will likely take 12 to 18 months for prices to bottom out.”
Even if the Fed doesn’t lower the rates anytime soon, the more we head into somewhat of a recession, the more investors will put their money in the bond market, and we know that mortgage rates are tied to the US Treasury bond. The more money goes into the Treasury, the lower mortgage rates can be expected.
At least, that is what typically happens.
Moody’s also provided data that Fortune turned into an interactive map, showing which of the 400 regional US housing markets are “overvalued” or “undervalued.” The top three “overvalued” regional markets, I believe, are Boise (76.9%), Flagstaff (65.58%), and Austin (61.1%).
It is important to note this because the predictions from these companies are on a national scale. Things will be different for each local market. Some markets will be hit harder than others, while other markets won’t be affected at all, or are even doing well. Because, as I said before, real estate is regional.
Fitch Ratings also gave its forecast, saying US home prices could fall 10% to 15%.
“The likelihood of a severe downturn in U.S. housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023 and further pressure in 2024,” wrote Fitch Ratings researchers on Tuesday.
Still very far from what a crash looks like.
Fortune ends the article with this: “Of course, if home prices actually drop 10% to 15%, Fortune might rebrand the Pandemic Housing Boom. The Pandemic Housing Bubble sounds more fitting.”
This goes with the whole theme of nobody knowing what is happening. We are all just kind of living day by day. All we know is that it is an affordability issue and that the Fed has no clue what they are doing—they keep on increasing the rate to get a handle on inflation. We just have to see where it goes, based on the information we have day-to-day.
The more information we have, the better decisions we can make. Pay attention to the details, and try to look at the facts with scrutiny to determine where the bias could be. Have an awesome day.