Posted on Aug 22nd, 2022

This summer, the U.S. housing market entered into a sharp slowdown. That only intensified last month. On a year-over-year basis, new-home sales and existing-home sales are now down 17.4% and 20.2%, respectively. While single-family housing starts and mortgage purchase applications in July were 18.5% and 18.4% below levels they hit a year ago. Simply put: One-fifth of housing activity just got shaved off.

That sharp contraction in the U.S. housing market—something both the National Association of Realtors and the National Association of Home Builders are calling a “housing recession”—has economists rethinking their 2023 housing forecasts. On Thursday, Zillow became the first real estate firm to use the sour July housing data to readjust its outlook.

Over the next 12 months, Zillow now predicts that U.S. house prices will climb just 2.4%. That’s down from the 7.8% it forecast just a month earlier.

If the year-over-year rate of national home price growth—which hit 19.7% in May—decelerates all the way to 2.4%, it will mean several markets post falling home prices. That’s exactly what Zillow’s revised forecast predicts. Back in July, Zillow economists predicted five regional housing markets would see falling home prices over the coming year. Now Zillow economists predict 123 regional housing markets will see falling home prices. In all, Zillow analyzed 911 markets.

Zillow’s biggest forecasted home price decline (-4.6%) comes in Fairbanks. Not too far behind are Charleston, W.Va. (-4%); Lake Charles, La. (-3.8%); San Jose (3.6%); and Odessa, Texas (3.3%).

Earlier this month, Fortune dubbed Zillow the last "housing bull left standing." But this downward revision makes it clear: Zillow is no longer bullish on price growth. If Zillow's 2.4% uptick comes to fruition, it would mark the lowest year-over-year home price growth jump since 2012.

That said, don't call Zillow a housing bear. Among the 911 regional housing markets that Zillow economists analyzed, 780 markets are poised to see higher home prices over the coming year. Of those, 140 markets are poised to see a 5% or greater home price growth. That includes markets like El Centro, Calif. (8.5% forecasted growth); Homosassa Springs, Fla. (8.4%); Ocala, Fla. (8.2%); Idaho Falls, Idaho (8%); Sebring, Fla. (7.8%).

Heading forward, the best housing indicator to watch is inventory. If a housing market is going to experience falling home prices, it will first see a huge uptick in inventory levels. Nationally, active listings on Realtor.com jumped 128,200 last month to 747,500. That's the single biggest jump in the site's database, which goes back to 2016. However, the chances of a nationwide home price correction in August remain low given the fact that U.S. inventory levels are 44% below pre-pandemic levels.

Sellers in some markets aren't so lucky. Frothy markets like Boise and Phoenix have already seen inventory levels soar above pre-pandemic levels. If inventory continues to soar, those markets could become the first to post year-over-year declines in home prices. There's no consensus when it comes to 2023 housing forecasts. Firms like CoreLogic, Fannie Mae, Freddie Mac, and Zillow are all still forecasting positive home price growth over the coming year. Meanwhile, firms like John Burns Real Estate Consulting, Zonda, and Zelman & Associates are all predicting falling home prices over the coming year. Famed economist Robert Shiller predicted the last housing bubble and thinks U.S. home prices could fall 10%.

Why are 2023 home price forecasts all over the place? It boils down to uncertainty at the macro level. If inflation proves stubborn, the Federal Reserve could tighten more than financial markets are currently pricing in. If that occurs, mortgage rates would go even higher. Reversely, if inflation recedes sooner than expected or a recession manifests soon, the Fed could loosen financial conditions.

At the end of the day, the Fed's inflation fight is the clear culprit for the U.S. housing market slowdown. As activity declines in rate-sensitive sectors like housing, it helps to weaken the overall economy and put price growth in check. But any deviation in the Fed's plan, of course, will have consequences for the U.S. housing market. For that reason, it might be wise to take all 2023 housing forecasts with a grain of salt. There are just too many unknowns.

Wherever we go next, it should be friendlier to buyers. At least compared to the ruthless Pandemic Housing Boom.

"We are coming from a housing market where buyers had no negotiating power. It was the ultimate seller’s market," Ali Wolf, chief economist at Zonda, tells Fortune. "What appears to have changed is a shift in power. We are finally seeing some metros turn buyer-friendly and other areas straight-up return to a buyer’s market."

Source: Fortune.com