Real Estate Outlook: Top Economists Weigh in on Where Real Estate is Heading

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The COVID-19 pandemic turned the world upside down and changed how we live, work and play. We are all learning to live with these changes, and we are adjusting to facing unforeseen challenges. Coming off of record-high home price appreciation, record-low inventory, falling and then rising interest rates, and consumer behavior that challenged traditional norms, we all want to know what’s next for real estate.

We’ve gathered opinions from several economists on the current and future state of the U.S. real estate market and where experts believe things are headed. Affordability and continued supply-and-demand issues remain at the forefront, with home price appreciation moderating and even declining in some markets.

Goldman Sachs Chief Economist Jan Hatzius predicts a continued cooling down of the market in 2023, which has already begun with rising interest rates, and he expects home prices to “stall completely” next year. But the decrease in home price appreciation, along with higher interest rates, may not be enough for buyers who still can’t afford to get in the game. “We expect home price growth to stall completely, averaging 0% in 2023,” Hatzius wrote in a note to clients. “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”

Hatzius went on to say: “Higher mortgage rates and reduced affordability are not the only drag on housing. Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand.”

First American Chief Economist Mark Fleming also weighed in recently on affordability. The First American Real House Price Index (RHPI) increased by 53.3% on an annual basis, as of June 2022, which set a new record for the fifth consecutive month for the fastest year-over-year growth in the more than 30-year history of the series. “This rapid annual decline in affordability was driven by an 18.5 percent annual increase in nominal house prices and a 2.5 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago. Even though household income increased an impressive 4.7 percent since June 2021, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices.”

Fleming went on to comment on the cause and effect of supply and demand against home price appreciation with all 50 top markets seeing moderation in rising home prices. “While all top 50 markets are pulling back from their respective peaks in price appreciation, some markets have decelerated faster than others. There remains a structural and long-term national supply shortage in the housing market, but in some cities the pullback in demand is strong and inventory is rising faster, resulting in a greater moderation of house price growth,” said Fleming.  

Despite a cooling housing market and rising interest rates, home prices haven’t significantly fallen across the board, but most economists expect the deceleration to come.

CoreLogic recently released a report showing rising interest rates helped tamp down unsustainable price growth, with month-over-month home prices declining by 0.3% from June to July – the first month-over-month decline in over a decade. The company expects a more “balanced” housing market next year, with year-over-year appreciation slowing to 3.8% by July 2023. “Following June’s surge in mortgage rates and the resulting dampening effect on housing demand, price growth is taking a decisive turn,” said Selma Hepp, interim lead of the Office of the Chief Economist at CoreLogic. “And even though annual price growth remains in double digits, the month-over-month decline suggests further deceleration on the horizon. The higher cost of homeownership has clearly eroded affordability, as inflation-adjusted monthly mortgage expenses are now even higher than they were at their former peak in 2006.”

Moody’s Analytics’ Chief Economist Mark Zandi told MarketWatch in August he’s expecting a “correction” in home prices, with declines in the low-single digits – around 5% – with even greater price declines in some of the hotter markets in the west, mountain west and south to southeast. But, he says, these price declines won’t be anything like what happened in 2008. “Crash is what happened back in the financial crisis — that was a crash. That’s not what we’re gonna have here,” said Zandi.

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