February 28, 2023

The Case Shiller Index of Home Prices in 20 cities fell 0.5% in December after having declined 0.5% in November.  This is the sixth monthly decline in this series.  After a long period of rising rapidly, prices have begun to fall and they should continue to decline for many months to come.  Over the past year home prices have risen 5.6% which is a lot slower than the steady diet of 20% increases we were seeing earlier in the year.

A broader index  for the entire U.S. — which would include a large number of smaller cities — fell by 0.3% in December after declining 0.3.% in November  For the year as a whole this series has risen 6.6%.   We expect this index of home prices to decline by 0.5% or so monthly throughout 2023.  For the year as a whole we expect this series to decline by 4.7%.

Craig J. Lazzara, Managing Director at S&P said, “The cooling in home prices that began in June 2022 continued through year end, as December marked the sixth consecutive month of declines for our National Composite Index,”  He added that, “The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers. Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

What about housing affordability?  There are three pieces to this equation.  First, as noted above, home prices have begun to fall and we expect them to decline each month as the year progresses.

Second, mortgage rates climbed from 3.0% at the end of 2021 to the 7.0% mark before retreating in recent months to 6.5%.  We look for mortgage rates to peak at roughly 7.0% in the middle of this year as the inflation rate remains higher than is expected currently.

Third, job gains and wage hikes are boosting consumer income.

With the housing affordability index at 101.2 in December potential buyers had 1.2% more income than was necessary to purchase a median-priced home.  Mortgage rates should rise slightly through the middle of this year.  But home prices will steadily decline, and consumer income should rise.    We suspect that by yearend 2023 that the affordability index will have risen slightly to about 113% which means that potential buyers will have slightly more than enough money to purchase a median-priced home.

Potential buyers at the low end of the market — typically first time home buyers — are the ones primarily getting priced out today.  Higher down payments and rising monthly payments have caused potential buyers for homes priced at or below $300,000 to defer their purchase.  However, falling home prices and lower mortgage rates should help. By March of this year the down payment on a median-priced home should have fallen from a peak of $84,000 to $70,000.  The monthly payment should have shrunk from a high of $2,000 per month to $1,775.  Those declines will make housing for lower income families far more affordable and should cause them to restart their search for an affordable home.

The supply of existing homes available for sale is still very low.   At 2.9 months the supply of homes on the market is about one-half of the 6.0 month supply required to balance supply and demand.  Contrast that with the roughly 10-11 month supply available during the so-called “Great Recession” in 2008-09.  With so many homes on the market at that time, home prices fell rapidly.  Reduced supply today will prevent prices from falling more rapidly.

We expect 1.3% GDP growth for 2023.  .  Businesses are still hiring as rapidly as they can.  The ratio of consumer debt to income remains very low.  And while interest rates should rise somewhat through the spring, real rates will remain sharply negative until mid-2023.  Hence, interest rates will not be high enough to be a significant brake on the economy at least through the middle of this year.

Stephen Slifer


Charleston, SC