Potential 5% Growth in 2023 Home Prices

Home prices have increased due to market competition, which has caused Zillow to reevaluate its prediction for a price rise. In contrast to their prior prediction of 1.5%, Zillow’s Chief Economist, Skylar Olsen, forecasts that home prices could increase by as much as 5% in 2023. According to the most recent data from Zillow, U.S. home values increased by 1.4% from April to May, the most significant monthly increase since June 2022. At $346,856, the mean home value has increased by 3.4% since January’s low and by 0.9% from the year before.

The cost of new loans has dramatically climbed along with housing values. Currently, a new loan for a typical U.S. home costs just under $1,800 per month, which is a 22% increase from May 2018 and twice as much as last year. With October 2022 coming in second, this is the second-highest cost ever recorded. Six of the seven metro areas in the Midwest showed the largest rises in May, indicating that the Midwest has seen the most significant increases in property values. But compared to the prior year, the number of new listings has declined by 23%, most likely due to rising mortgage rates making new loans less alluring.

Increased Mortgage Demand as Rates Ease

For the second week in a row, mortgage rates declined from their previous highs, which triggered demand from current and aspiring homeowners. Compared to the prior week, the number of mortgage applications increased by 7.2%, according to the Mortgage Bankers Association. More applications for loans with a 20% down payment were received due to the average interest rate for 30-year fixed-rate mortgages dropping to 6.77% with a modest decline in points.

Refinance applications increased by 6% from the previous week, although they were still much lower than they had been at the same time last year. Despite the decreased rates, some borrowers choose not to refinance because mortgage rates are still over a percentage point higher than a year ago. House purchase applications increased by 8% for the week but were still 27% fewer than in the same period last year.

Higher rates than last year and a low supply of homes have been cited as reasons for restricting home-buying activity. Mortgage rates could be affected by the Federal Reserve’s policy meeting and revised rate projections in the upcoming week, with expectations of increased pressure if the Fed signals more rate hikes in 2023.

Housing Inflation Expected to Decrease Soon

The consumer price index (CPI), which includes housing as a significant component, significantly impacts inflation data. Its percentage in the CPI is over a third, making it the consumer good or service with the most significant influence on overall inflation trends. Although home inflation has stayed strong recently, experts think it has peaked and will soon begin to drop. While housing inflation has remained high in recent months, economists believe it has peaked and is likely to decline quickly.

One challenge with tracking housing inflation accurately is that the CPI operates with a significant lag. It can take six months to a year for changes in housing prices to be fully reflected in the inflation data. The U.S. Bureau of Labor Statistics, responsible for collecting rent data, gathers information from sample households every six months, divided into different subgroups collected at different times. This data collection process, spanning multiple subgroups, leads to delays in capturing real-time housing price trends.

According to economists, the cost of housing will soon start to decline. As housing’s influence on total inflation declines, they predict a decrease in the year’s second half. As per the most recent CPI report, experts are still optimistic that the trend will soon reverse despite a monthly increase in home inflation in May.