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This year’s housing market has been difficult for Wall Street to target, and analysts’ predictions have often been off the mark.
Wells Fargo economist Charlie Doherty predicted in March that home prices nationwide would fall 4.5% this year. But by October, when mortgage rates approached 8%, Doherty abandoned that outlook and instead predicted house prices would rise 1.8% in 2023.
he is not alone. Economists surveyed by Bloomberg, as well as forecasters from Morgan Stanley and Goldman Sachs, are also following suit, as they often deviate from their past predictions for this year’s prices, new home sales and mortgage rates. I realized that I was being chased.
The revisions may have led many to underestimate the resilience of housing demand in the face of rising mortgage rates in the early stages, and the impact of low interest rates on potential sellers, including availability and price. This shows that they were not fully aware of the impact they would have.
“If I were to take myself back to early 2023, when I was writing this report, I would say that the strength of the economy is one of the biggest factors, and that’s why housing activity and house prices are a little bit more resilient than they were before. I would say, ‘I expected that,”’ Dougherty said in an interview with Yahoo Finance.
“It’s hard to predict. That’s one of the challenges of predicting these things because there are all these different factors involved.”
Housing price revision
As of October, home prices rose 4.8% from a year earlier, the fastest rate of growth so far this year, according to the latest data from the S&P CoreLogic Case-Shiller National Home Price Index.
This is more in line with James Egan’s forecast this month that house prices will rise 4% year-on-year from December 2022. Still, it took Morgan Stanley strategists a while to arrive at such an accurate forecast.
Earlier this year, Egan’s crystal ball predicted prices would fall 4%, rather than rise by much. He later revised his forecast in June, saying prices would be flat this year. He said in August that the temporary price decline earlier this year would be short-lived.
“While we expect a third consecutive negative print within two weeks, we still expect next month’s Case-Shiller print to be -0.2% y/y/+0.8% m/m; “The expansion may be over as we enter negative territory,” Egan wrote in August.
Other Wall Street banks have followed suit, predicting home prices will fall this year, including Goldman Sachs fixed income strategist Vinay Viswanathan, who said in March that home prices would fall. It was expected to decline 6.1% compared to the previous year. Viswanathan softened his outlook in June, expecting a decline of just 2.2%.
“The housing market has proven to be even more resilient than we expected,” Viswanathan wrote. “While we recognize the tailwinds from tight housing supply, we expect affordability to continue to be depressed, which is likely to ultimately drive down prices in 2023.”
Mr. Viswanathan withdrew the plan two months later, saying prices would rise by 1.8% over the year. The investment bank now predicts home prices will rise 2.0% by year-end as mortgages retreat from recent highs.
Amazing new home sales
The main reason for the price recovery was a stubborn lack of inventory on the resale market, which drove up the prices of the few homes for sale.
Many homeowners who wanted to move were financially stuck in their homes due to the low interest rates they secured when buying or refinancing during the pandemic. This interest rate was likely to be half the rate they would get if they sold and bought another home, giving them a strong incentive to maintain that rate.
The result is an interesting dichotomy, with rising mortgage rates ravaging the existing home sales market and deterring buyers and homeowners alike. But there are enough buyers left in the market, and builders have regained some slack by offering more attractive incentives for new homes.
Their strategy worked, surprising analysts and economists in the spring.
Economists surveyed by Bloomberg forecast home sales for March and April fell by 45,000 and 47,000 units, respectively, as first-time buyers entered the new home market. The largest construction companies have offered aggressive interest rate buying if builders pay upfront to lower buyers’ mortgage rates.
Sales at major construction companies surged in the first and second quarters of this year, beating analysts’ expectations and providing a reversal from the recession experienced at the end of 2022.
“Spring sales are off to a strong start, with our net sales orders up 73% sequentially from the first quarter,” DR Horton CEO David Auld said in an April press release. “I am doing so,” he said.
“Demand improved in the quarter despite higher mortgage rates and inflationary pressures, due to the use of incentives and price adjustments to adapt to changing market conditions, as well as normal seasonal factors,” Auld said. Stated.
Following this news, the company’s stock price rose 7%.
PulteGroup quickly delivered similar, better-than-expected rosy results. Toll Brothers also reported better-than-expected financial results in May, citing a shortage of existing homes for sale.
“This phenomenon has been a boon for home builders,” Toll Brothers CEO Douglas Yearly said at the time on the company’s earnings call.
As a result, housing construction stocks also temporarily attracted attention.
“It was a really interesting story,” Dougherty said. “The extent of [builders] It’s a bit of a surprise that they were able to continue offering these incentives despite rising mortgage rates. ”
The surprises aren’t over yet.
The biggest miss to Bloomberg consensus estimates this year just happened, and there was a downside. The consensus estimate for new home sales in November was 690,000 units, but the actual total was 100,000 units lower. The second biggest failure was in October, when actual sales were 49,000 fewer than predicted.
Still, hopes that mortgage rates will fall in 2024 could once again boost new home sales after the Federal Reserve predicted three rate cuts next year.
rate volatility
And that’s the crux of it.
Changes in mortgage rates this year have been a major contributor to the unpredictable housing market. What is too high for a homebuyer? What is low enough to convince a homeowner to sell? What is the level at which prices do not rise too much?
Many housing economists and strategists expected interest rates to end the year somewhere in the mid-6% range, but they didn’t expect the turbulent path it would take to get there. In fact, interest rates are currently close to that level, ending the last week of December at 6.61%, the lowest level since May.
But before that happened, interest rates soared to a 23-year high, prompting the National Association of Realtors’ chief economist to warn everyone to prepare for 8% mortgage rates by the end of the year.
Eventually, interest rates rose to 7.79% in late October. This comes at the same time that Dougherty announced that he expects mortgage interest rates to reach 6.94% at the end of the year, significantly higher than his previous forecast of 5.86% in March.
“There were ups and downs,” Dougherty said. “The biggest surprise was how much mortgage rates rose due to rising inflation and the Fed’s monetary tightening. It was a safe bet that mortgage rates would remain high.”
Going forward, Mr Doherty said: “We will see some improvement in affordability because we are not seeing the rapid rise in house prices that we have seen in recent years, and homebuyers will see lower mortgage rates. “There is a high possibility that we will see some improvement in the future.” Next year’s housing market will be a little more active. ”
Let’s take a look.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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