What Recession? US Real Estate Industry Bizarrely Forecasts Price & Rent Boom

The US real estate industry laughs at your negative outlook—they think things are about to boom. Realtor.com released its 2023 forecast this week, and noted the negative factors building. Their forecast includes higher financing costs, reduced leverage, fewer exist-home sales, and a lot more inventory. However, their forecast bizarrely concludes it will result in higher home prices and rents. Okay… 

US Mortgage Rate Forecast To Rise Further Next Year

Mortgage rates are expected to surge to a level significantly higher than we’ve seen over the past decade. They’re forecasting 5.5% will be the average rate this year, and it’ll climb to 7.4% next year. It’s not just a big jump from the 3.0% in 2021, the organization estimates 2013 to 2019 only averaged a 4.0% rate. This should significantly throttle credit, which typically leads to lower prices— though that’s not how the industry sees it. We’ll come back to this point. 

US Existing-Home Sales To Fall Sharply, On Top of Current Declines

US home sales are seen dropping to an unusually low level next year, following this year’s huge decline. Existing home sales are forecast to fall 13.8% in 2022, followed by a forecast decline of 14.1% next year as well. If hit, 2023 existing-home sales are forecast to be a whopping 26% lower than 2021-levels, and 14% lower than the average annual sales from 2013 to 2019, according to Realtor.com data. Demand is forecast to be much weaker than usual next year, and keep that in mind when reading the rest of this. 

US Existing-Home Inventory Is Expected To Soar In Coming Months

Fewer sales can still lead to tighter demand and higher prices if inventory falls too, but luckily that’s not the case. Their economics team is forecasting this year will see a 4% increase in listings on average, followed by a 22.8% increase next year. That’s correct, inventory will rise by more than a fifth of this year’s increase.

Industry Giant Forecasts Higher Prices & Rents

Higher mortgage rates, a sharp decline in existing-home sales, and a sudden surge of inventory. Most would conclude those conditions would lead to a contraction. Not the Realtor.com team—they actually see this as driving robust growth. 

First up are existing-home prices, where the median price isn’t forecast to contract—but rise. The recent record boom was the fastest in history, with prices rising 17% in 2021, and they’re on target for a 10.2% increase this year. The firm is forecasting a 5.4% increase next year, just slightly under the 6% average annual growth from 2013 to 2019.   

On top of that, the robust rent growth we’ve seen is also forecast to continue rising. Average rents grew 10% in 2021, and they’re on track for another 7.7% this year. They’re forecasting another 6.3% growth next year, a whole 1.3 points faster than the average from 2013 to 2019. It’s a bold call for a recession to produce higher than average rents, but that’s what they’re going with. 

Higher financing costs, a sharp decline in sales, and significantly more inventory typically leads to lower prices. The past pandemic-recession is considered an anomaly due to the scale of monetary response that accompanied the recession. 

However, the current high inflation environment makes it difficult to mount a similar type of response. It would be counterproductive to the monetary policy issues, though that doesn’t appear to be a concern for the industry. 

The US Federal Reserve has been flat out calling a correction in home prices. They warned home price growth has been faster than any other cycle, and a soft landing is difficult to make. On the upside, they also explain households aren’t in the same negative position they were in 2006, and the impact will be much less significant.