Short- and Long-Term Outlook for Housing Sector

Inflation, high home prices, low inventory, and economic uncertainty continue to impact the housing market and consumer confidence. What happens from here?    

The short-term outlook for the housing market is fairly austere. Home contract signings, new home pending sales, and housing starts are all down. 

Mortgage rates have reached a 20 year-high and are expected to remain high for another 1-2 years. There has been a 77% average increase in monthly mortgage costs since early 2022 due to higher home prices and borrowing costs, which have intensified other affordability concerns, like rising costs for transportation, food, and other basis living expenses.

National home prices have increased across all home types, including a 13% year-over-year increase for entry-level homes (now averaging $342,193), an 11% increase in move-up homes (averaging $530,392), and a 9% increase in high-end homes (averaging $906,990). The national median asking price for a home is $425,000 and the national median mortgage is $1,117. 

Many prospective home buyers have been pushed to the sidelines, waiting for home prices and mortgage rates to drop.

How Low Will Home Prices Go? 

Home prices are starting to decline in some markets, with a faster cool-off in “Zoomtown” markets like Denver, Austin, Phoenix, and Boise, which experienced explosive growth during the pandemic and where wage increases haven’t kept up with soaring housing costs. 

Experts predict that most markets will ultimately experience a 7-10% drop in home prices, with some of the overvalued markets suffering a 20-30% decrease, although we might not see that extent of decline in 2023.

Sellers are finding themselves forced to make concessions that were unthinkable in heady pandemic times, offering incentives that, on average, add up to nearly 2% of the average list price.

But even with strong headwinds, it’s unlikely that housing prices will freefall—stricter underwriting practices, higher levels of homeowner equity, and low inventory should prevent 2008-like chaos.

Red Flag: First-Time Homebuyers

One housing metric worth noting is that first-time home buyers comprise the smallest share of the market since this data has been tracked (26% today vs. a historical average of 40%.)  These buyers are having difficulty competing in an inventory-constricted market against cash-flush investors and repeat home buyers. They are being replaced by older, wealthier, and less diverse buyers. 

Furthermore, while incomes are projected to grow by approximately 4% in 2023, that increase will not be enough to offset high mortgage rates and home price growth, making saving for a down payment more difficult for prospective first-time buyers who don’t have any existing home equity to leverage.

 Rental Market Dynamics

There is at least a little good news for renters. Negative demand for rentals (more people moving out of rentals than moving in) is offering moderate relief on monthly rents, which has reached a median national market rate of $1,797. 

The bad news is that the percentage of rentals to ownership is at the highest level in 55 years, contributing to a vicious cycle that prevents renters from creating home equity and wealth (more years renting means fewer years owning a home and increasing equity.)

Furthermore, 70% of rentals are now run by large companies and investors that use algorithms to determine pricing. This computer-driven pricing prevents renters from being able to negotiate for better terms and pushes up rents beyond what human landlords would typically sanction.

Green Builder Editor in Chief Matt Power predicts that we’re going to start seeing restrictive rental legislation at the metro level, such as rent caps, limits on rent increases, and tenant protections.

Builder Confidence

Despite the cooling market, Green Builder Media’s COGNITION Smart Data shows that over 60% of home builders are optimistic about the market. In fact, our research indicates that many builders are happy to have a little breathing room and a pause from the zaniness of the pandemic years, and they report enough of a backlog to keep them confident about their long-term prospects (respondents say that they feel good about 2023, although they do have worries about 2024 and 2025 if the economy goes into a recession.)

More than 70% of builder respondents expect that the Inflation Reduction Act and Infrastructure Bill will have a positive impact on their businesses, believing that they’ll be able to access incentives and rebates for high-performance products, electrification technology like heat pumps and induction cooktops, solar and battery storage, and demand side energy management systems, enabling them to offer higher value homes at a better price (and higher profit.)

Long-Term Prospects

While we’ll continue to experience short-term market fluctuations, there are four main factors that will keep the housing sector stable for years to come. 

First, historical home buying segments—comprised of growing families that need bigger homes, seniors who move for retirement and healthcare reasons, and workers who move to be closer to offices—are all still buying. Household formation rates for Millennials and older Gen Zs continue to rise, driving demand for larger homes to meet their changing families’ needs. 

And while the number of workers moving for job opportunities is increasing, the number of remote workers moving away from dense urban areas remains steady. 

Second, the acute shortage of attainable “missing middle” housing throughout the country, particularly in fast-growing areas where jobs are being created, will bolster the housing sector for many years to come. Fannie Mae estimates that the nation is short upwards of these 3.8 million missing middle homes, and as Millennials and older Gen Zs hit their peak home-buying potential, demand will continue to mushroom.

Next, while demand remains high, the supply of homes that actually meet today’s homebuyer’s needs is falling woefully short. Housing products that may have been acceptable to Boomers or Gen Xers seem downright medieval to younger generations. 

This shift in consumer expectations will fuel the need for net zero, electric, healthy, resilient, connected, solar-powered, and, in some cases, prefab homes.

Finally, the model of homeownership is transforming in our country. Hospitals, school districts, and corporations are developing communities, offering housing as a way to retain and incentivize employees, offering creative rent-to-own scenarios in some cases.

Despite uncertainty over short-term market conditions, most housing economists recognize the current “right-sizing” of the market as a period of stabilization that will bring the pace and costs of building back to earth.

Assuming their forecasts are correct, professionals who want to future-proof their business by designing and building next-generation homes and communities are facing an ocean of opportunity. 

This story is part of a special report presented with generous sponsorship from: ProVia, Whirlpool, Cultured Stone, and Sonos.