BAM Key Details: 

  • Researchers at Capital Economics recently shared their predictions on the 2023 housing market. 
  • Sam Hall, Property Economist, pointed to signs the housing market may be close to a trough, with recent improvements in affordability, albeit from a record low. 
  • Agents on the ground are seeing more buyer activity in response to lower mortgage rates, but economists predict a further drop in home prices is needed for a full recovery.

Researchers at Capital Economics have made some predictions on the 2023 housing market, pointing to signs the market may be close to a trough, thanks to recent improvements in housing affordability and home buyer sentiment—albeit from record lows.

The good news is brokers and agents across the U.S. are feeling more optimistic. It helps that mortgage rates have dipped over the past few months, allowing more home buyers to re-enter the market. 

Many agents on the ground are already seeing a jump in home buyer activity compared to the previous month. Plus, mortgage applications have increased in the past couple months, which should contribute to higher home sales.

Affordability is still tenuous since summer of 2022

Spiking mortgage rates last spring threw a chilling wet blanket on the Pandemic Housing Boom and sent housing market transactions into free fall. By December 2022, mortgage purchase applications had dropped over 40% year-over-year.

That said, the latest predictions from Capital Economics brings some good news for both builders and real estate agents: housing market activity may be bottoming out.

That said, hitting bottom doesn’t guarantee a swift recovery.

Housing affordability still eludes many sidelined home buyers in the U.S. That will happen when home prices spike 41% in just over two years and mortgage rates more than double from 3% to over 6% within 12 months.

For most people, facing a monthly mortgage payment that’s hundreds or even a four-digit figure above what they would have paid at the beginning of 2022 is reason enough to hesitate and spend some time agonizing over the math—especially with inflation driving up other prices.

So, as Sam Hall, a property economist for Capital Economics, has said, in tune with other voices in the industry, any recovery in the U.S. housing market this year is likely to be tepid. 

Home buyer activity this year will depend on changes in affordability, the overall economy—including the Fed’s actions—and local home prices, whether they fall or hold steady.

Capital Economics predictions for 2023

In Hall’s own words, here’s what researchers at Capital Economics are predicting: 

We expect 2023 will be the weakest year for sales since 2011 and for starts since 2014.  Meanwhile, we think house prices will need to fall by a further 6% or 7% to bring affordability back to a level that will support more ‘normal’ levels of demand.

Sam Hall

Property Economist for Capital Economics

As of October 2022, the Case-Shiller National Home Price Index shows a 2.4% drop in U.S. home prices compared to the June 2022 peak.

This year, Capital Economics predicts home prices will fall 6%. They also expect to see a drop in the average 30-year mortgage rate to 5.75% by the end of the year.

Peak-to-trough, Capital Economics expects home prices to decline by 8% to 10%.

Moody’s Analytics predictions

Mark Zandy, Chief Economist for Moody’s Analytics, agrees that home sales are near bottoming out—and that home prices in general have further to fall.

Housing demand (home sales) is close to a trough, housing supply (housing starts and completions) has yet to hit bottom, and [U.S.] house prices have a way to go before reaching their nadir.

Mark Zandi

Chief Economist for Moody's Analytics

Peak-to-trough, Zandi expects a 10% drop in U.S. home prices—with more dramatic corrections happening in “overvalued” markets out West.

If Moody’s and Capital Economics are correct in their predictions of a 10% drop, home prices as measured by Case-Shiller would fall back to October 2021 levels—marking the second biggest housing price correction in the Post-WWII era.

On the other hand, it would still pale compared to the 26% drop in nationwide housing prices from the top of the housing bubble in 2007 and the bottom of the housing crash in 2012.

BAM’s hot take on these predictions

In Tuesday’s episode of the Hot Sheet, Byron Lazine spoke on Fortune Magazine’s post regarding the Capital Economics housing market predictions

This is really good news for a lot of people if these home sales are bottoming out. This likely only happens if we get a little bit of inventory, but we’ve seen interest rates that have gone from the mid-7s now into the low-6s over the past two months. There’s a lot of optimism that we could even get into the 5s…That, as well, would help more buyers get off the fence and increase transactions—if there’s inventory available to them.

Byron Lazine

He also touched on the forecasted drop in home values and what that means for homeowners and property investors.


Source: Fortune

If we come down to this yellow line, it’s still well above any time period in terms of home values, as it dates all the way back to the year 2000. This line is well above home values in the last 20+ years. So, for homeowners, that would be very welcome news to see that, ‘Okay, even if it goes down 10%, I’ve got 41% in the last year. I’m not going to lose all this equity.’ And I think a lot of homeowners and investors are going to like that if it does, in fact, come out to be true.

Byron Lazine

Top takeaways for real estate agents

You may already be seeing more buyer activity this month, and you aren’t alone.

But whatever’s happening in your local market, prepare for every conversation with a potential client with the data they need to make informed decisions when they’re ready to sign an agreement as a new (or returning) buyer or seller. 

These predictions by Capital Economics, Moody’s Analytics, and economists give us reason to hope that more buyers and sellers will see the increase in affordability they’ve needed, especially in the midst of economic uncertainty.

If that optimism reaches home builders and results in a healthy boost to housing inventory, the predicted 10% housing price adjustment becomes all the more likely.

That’s news worth sharing with your prospects, clients, and community.