{"id":145846,"date":"2022-12-05T09:35:40","date_gmt":"2022-12-05T16:35:40","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=145846"},"modified":"2023-08-09T10:29:47","modified_gmt":"2023-08-09T16:29:47","slug":"another-firm-changes-its-forecast","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/another-firm-changes-its-forecast","title":{"rendered":"Another Major Firm Changed Its Forecast\u2014Home Prices Could Fall Further Than Expected"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC5494967339&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Economists at Morgan Stanley have revised their housing forecast for the coming years downward, following on the heels of other firms that have adjusted their estimates of how far prices will fall. Morgan Stanley now expects prices to fall&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/biz.crast.net\/morgan-stanley-slashes-its-us-housing-market-outlook-heres-where-it-sees-home-price-recovery-in-2023\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">10% from peak to trough<\/span><\/a><span data-preserver-spaces=\"true\">, a bleak shift from the firm\u2019s earlier estimate of a 7% decline. But if a broader recession develops with an increase in unemployment, the company says prices could fall up to 20%.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In October, Capital Economics&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.capitaleconomics.com\/publications\/us-housing-market-update\/house-prices-fall-8\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">revised its forecast<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;from a 5% price decline to an 8% price decline. Moody\u2019s Analytics also adjusted its insights&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/cre.moodysanalytics.com\/insights\/research\/housing-sector-in-the-second-quarter\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">in August<\/span><\/a><span data-preserver-spaces=\"true\">, September, and October, estimating a steeper drop each month. The economic research firm&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fortune.com\/2022\/10\/05\/housing-markets-at-risk-of-25-to-30-percent-home-price-crash-moodys\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">now expects home prices to fall 10%<\/span><\/a><span data-preserver-spaces=\"true\">, and that\u2019s in a best-case-scenario. If a recession takes hold, prices could fall between 15% and 20%.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some economists are more optimistic, but even those who expected price growth through 2023 are beginning to change their tune. For example, Freddie Mac\u2019s&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.freddiemac.com\/research\/forecast\/20221021-quarterly-forecast-rapidly-rising-rates-declining-demand-driving-housing-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">October forecast<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;shows price declines of 0.2% for 2023, a turnaround from the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.freddiemac.com\/research\/forecast\/20220720-quarterly-forecast-market-slowdown-will-continue-high-rates-and-prices-exacerbate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">previous quarter\u2019s estimate<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that prices would rise 4% in 2023. It\u2019s clear that as the Fed struggles to get inflation under control, red flags in the housing market are causing experts to worry. No one is certain how severe the correction will be, but economists are monitoring the unpredictable factors that could impact the housing market, and they\u2019re not liking what they\u2019re seeing so far.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Why Are Housing Market Forecasts Getting Worse?<\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Rising interest rates are curbing demand<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Researchers at Morgan Stanley say that increasing home prices coupled with mortgage rate increases have caused affordability to decline faster than the bank has seen in the past. And the Fed plans to increase the Federal funds rate further in the future, though Fed Chairman Jerome Powell says the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2022\/11\/30\/business\/powell-fed-interest-rates-speech.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">increases may be smaller<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;going forward. Apparently, this month&#8217;s increase will be 0.50% instead of the typical 0.75% we\u2019ve seen throughout the year.<\/span><\/p>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2021\/11\/10\/home-prices-are-now-rising-much-faster-than-incomes-studies-show.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Studies show<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that home price growth is rapidly outpacing income growth in the United States. In the second quarter of 2020, the monthly payment for a 30-year fixed mortgage on a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fred.stlouisfed.org\/series\/MSPUS\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">median-priced home<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;would have been $1,123, assuming an&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fred.stlouisfed.org\/series\/MORTGAGE30US\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">interest rate of 3.25%<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and a 20% downpayment. Based on current elevated mortgage rates and the increased median home price, that monthly payment would be $2,440.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For a household earning $75,000 annually, that\u2019s a difference between a family spending 18% of their income on housing to now 39%. Financial experts typically recommend limiting housing costs to 30% of your income or less, and that\u2019s becoming a difficult goal to achieve for families with incomes around the median. The decline in affordability has shut some prospective buyers out of the market entirely. Even tight inventory isn\u2019t enough to shield housing prices from this shift in demand\u2014home prices have begun to decline for the first time since 2012, according to the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fred.stlouisfed.org\/series\/CSUSHPINSA\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">S&amp;P\/Case-Shiller U.S. National Home Price Index<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Growing inventory suggests homebuilders will discount prices<\/span><\/h3>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">The Washington Post<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.washingtonpost.com\/business\/rising-inventory-will-be-the-housing-markets-next-problem\/2022\/11\/28\/069db7cc-6f15-11ed-867c-8ec695e4afcd_story.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">reports<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that housing inventory is exhibiting an unusual trend\u2014the supply of available homes is climbing ahead of the expected surge of new listings at the beginning of the new year. Though there is still a supply shortage relative to demand, January typically increases inventory as sellers and agents try to close transactions before the summer.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Fannie Mae&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.fanniemae.com\/research-and-insights\/forecast\/housing-and-interest-rates-continue-suggest-recession-likely-2023\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">notes<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that the inventory-to-sales ratio is already approaching pre-pandemic levels as the number of completed homes begins to rise. This could leave homebuilders with no choice but to discount the prices of new homes. And when January rolls around, home-selling activity will pick up even more. Spring is the ideal time to host an open house, and families want to settle in before the school year begins\u2014that\u2019s the thinking behind the trend.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">During downturns, early-year inventory spikes have been dramatic, and inventory is already increasing ahead of schedule. With continued affordability pressure, an increase in the supply of homes would drive prices down.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Is Price Growth Still Possible?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to some economists,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/nar-economist-housing-prices-rise\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">prices could rise<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;nationally in 2023. But that\u2019s only a possible outcome if mortgage rates stay at around 7% or come down. But while the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/tradingeconomics.com\/united-states\/inflation-cpi\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">inflation rate has slowed<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;the past few months, it was still at 7.7% in October, which is far from the Fed\u2019s target. The Fed has said they will continue to raise rates until inflation is under control. At the same time, an influx of new U.S. jobs were&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/live\/2022\/12\/02\/business\/jobs-report-november-economy\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">added in November<\/span><\/a><span data-preserver-spaces=\"true\">, and unemployment remains steady, further challenging the Fed\u2019s goal. Even construction businesses added 20,000 jobs against an expected slowdown.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Of course, the upside of job growth is that low unemployment may prevent the economy from sliding into a recession and may provide a floor for falling housing prices. Morgan Stanley believes low inventory would have a similar effect. But for prices to remain flat or grow during 2023, mortgage rates will need to come down, and inventory will need to remain limited.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Would Cause Housing Prices to Fall 20%?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Morgan Stanley\u2019s worst-case scenario, which predicts a 20% decrease in home prices, including an 8% decrease in 2023, would only be likely with a prolonged recession and a vast increase in unemployment. While that kind of equity loss would be difficult on many homeowners who bought while prices were elevated, researchers at Morgan Stanley and other firms don\u2019t expect a housing crash that resembles 2008.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Mortgage lenders now have stricter credit standards, and today\u2019s borrowers are much less likely to default. Furthermore, mortgage servicers offer accommodations that can prevent liquidation. Homeowners also&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/middle-class-wealth-boom-is-over\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">built up wealth during the pandemic<\/span><\/a><span data-preserver-spaces=\"true\">, increasing their personal savings and realizing gains in home equity, which could help shield them from financial hardship. This won\u2019t be a credit-driven recession, and the outcomes for Americans\u2019 finances won\u2019t be as severe.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Still, the economy is behaving in unprecedented ways. What we endure over the next two years will be unique from past recessions, and it will affect every American differently. Though experts expect this housing correction to pale in comparison to the 2008 crash, we\u2019re still in for a wild ride\u2014one with potentially new hardships that we haven\u2019t learned to deal with yet.&nbsp;<\/span><\/p>\n\n\n\n<div class=\"wp-block-group border border-gray-200 p-6 rounded-md has-slate-50-background-color has-background\"><div class=\"wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow\">\n    \n  <div \n    id=\"segemnt-view-event-block_624f52525847f\" \n    class=\"  \"\n    x-intersect:enter.once=\"\n      analytics.track('On The Market Blog Sponsor View', {\n        referrer: 'https:\/\/www.biggerpockets.com\/blog\/another-firm-changes-its-forecast',\n              })\n    \">\n    \n  <\/div>\n  \n\n\n<h3 class=\"has-text-align-left mt-0 wp-block-heading\"><strong>On The Market is presented by Fundrise<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Fundrise-logo-horizontal-fullcolor-black-1024x252.png\" alt=\"\" class=\"wp-image-142373\" width=\"256\" height=\"63\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Fundrise-logo-horizontal-fullcolor-black-1024x252.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Fundrise-logo-horizontal-fullcolor-black-300x74.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Fundrise-logo-horizontal-fullcolor-black-768x189.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Fundrise-logo-horizontal-fullcolor-black.png 1380w\" sizes=\"auto, (max-width: 256px) 100vw, 256px\" \/><\/figure>\n\n\n\n<p class=\"mb-0\" style=\"font-size:16px\"><strong>Fundrise is revolutionizing how you invest in real estate.<\/strong><\/p>\n\n\n\n<p class=\"mt-0 has-slate-600-color has-text-color\" style=\"font-size:16px\">With direct-access to high-quality real estate investments, Fundrise allows you to build, manage, and grow a portfolio at the touch of a button. Combining innovation with expertise, Fundrise maximizes your long-term return potential and has quickly become America\u2019s largest direct-to-investor real estate investing platform.<\/p>\n\n\n\n<div id=button-custom-event-block_624f4a1837234 class='button-custom-event'>\n      <a href=\"https:\/\/t.sidekickopen84.com\/s3t\/c\/5\/f18dQhb0S7kF8cpngfW16gy-_59hl3kW7_k2841CX6NGN35Qwt3rN_mgW56Jw3w1HcgXpf197v5Y04?te=W3R5hFj26QkH2W4hJTY63T3pkxW3Fbt5S3Cdl5cf49M_4s04&#038;si=8000000019411002&#038;pi=6988e0ed-1aea-4af5-9769-8a0de4675eeb\" x-on:click=\"window.analytics.track(&#039;On The Market Blog Sponsor Click&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/another-firm-changes-its-forecast&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\" rel=\"noopener\">Learn more about Fundrise<\/a>\n  <\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Economists at Morgan Stanley have revised their housing forecast for the coming years downward, following on the heels of other firms that have adjusted their estimates of how far prices [&hellip;]<\/p>\n","protected":false},"author":613615,"featured_media":145849,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5528,7119],"tags":[],"class_list":["post-145846","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-news","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145846","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613615"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=145846"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145846\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/145849"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=145846"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=145846"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=145846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}