If the past two years represented a seller's market celebration in US real estate, 2023 appears to be shaping up as the year when buyers mount their counteroffensive. Recent projections from macroeconomic research firm Capital Economics provide data supporting this emerging trend, forecasting an 8% decline in US home prices this year. However, despite falling prices, housing affordability is expected to reach its worst level since 1985, presenting complex challenges for market participants.
Market Downturn: The Dual Impact of High Rates and Economic Slowdown
Capital Economics identifies elevated mortgage rates and potential economic recession as the primary drivers behind the anticipated price correction. Soaring interest rates have directly increased homeownership costs, pricing out many prospective buyers. Meanwhile, recession concerns have amplified market hesitancy, further suppressing demand. The report predicts the US economy will experience a "mild recession" in 2023, with single-family home sales declining to their lowest level since 2011 and new construction starts dropping to 2014 levels. This suggests builders will also scale back operations to align with weakening demand.
Industry Perspectives: Adjustment Period Could Span Two Years
Los Angeles-based real estate investor Annie Xiao observes the market is undergoing a necessary correction following the pandemic-era price surge fueled by historically low rates. She notes inventory levels have risen significantly while consecutive interest rate hikes have created a high-rate environment with declining transaction volume—a classic "price without market" scenario. Xiao anticipates this adjustment phase will persist for at least two years, with prices continuing to moderate until reaching equilibrium levels by 2024.
Lilian from Los Angeles-based ABC Loan Bank concurs with Capital Economics' assessment, emphasizing that persistent inflationary pressures will prevent the Federal Reserve from halting rate increases. This environment will maintain consumer caution and suppress real estate transaction volumes. She suggests a potential bright spot if rates retreat to 5.75% by year-end, setting the stage for market recovery in 2024.
Affordability Crisis: Price Declines Offset by Financing Costs
The report highlights a critical paradox—while home prices decline, affordability continues deteriorating. Elevated interest rates effectively neutralize much of the benefit from lower prices, resulting in higher monthly payments for buyers. This dynamic means homeownership remains financially inaccessible for many despite the price correction. Additionally, with fewer active buyers, market leverage is shifting decisively from sellers to buyers, forcing sellers to accept lower offers.
Market Outlook: Potential Recovery in 2024
Capital Economics projects mortgage rates could retreat to 5.75% by late 2023, with price growth resuming at a modest 2.5% pace by 2024's end. However, this forecast remains contingent on inflation control, Federal Reserve policy decisions, and broader economic recovery. For prospective buyers, careful monitoring of market conditions coupled with thorough financial assessment will prove essential for navigating the evolving landscape.
Buyer Strategies: Patience and Preparation
In the current climate, potential buyers may benefit from strategic patience—closely tracking interest rate trends, price movements, and economic indicators while realistically evaluating personal finances. Maintaining dialogue with experienced real estate professionals and lenders can provide valuable market insights to inform well-timed purchasing decisions.