SEATTLE – High mortgage costs are driving down competition among home shoppers, and a market firmly in favor of buyers is expected before the end of next year, according to a majority of the 107 economists and housing experts surveyed by Pulsenomics for Zillow.

The panel also expects rent growth to outpace inflation during the next 12 months, as priced-out potential homebuyers exert additional pressure on the rental market. Home values are ticking down slightly across the U.S. and more steeply in some of the most expensive metros, as well as metros that grew the fastest over the past two years.

The majority of the panel (56%) expects a significant shift in buyers’ favor by sometime next year, but 24% predicted that shift in 2024, 13% foresee 2025 and less than one in 10 (8%) expect it after 2025.

“After the frantic rush for real estate over the past two years, buyers are finally seeing a calmer market,” says Nicole Bachaud, senior economist at Zillow. “Those still able to afford homeownership are quickly regaining lost leverage, but this shift to a more balanced market is still in its early stages. Home shoppers priced out of the market are in a tight spot, though, as high and rising rents could cut further into their ability to save up for a down payment.”

Home price winners and losers

Inexpensive Midwest markets – such as Columbus, Indianapolis and Minneapolis – are the least likely to see price declines over the next 12 months, according to survey economists. Fast-growing markets in the South, like Atlanta, Nashville and Charlotte, are also expected to retain their heat.

Markets projected to cool the fastest are those that saw some of the largest growth over the course of the pandemic, including Boise, Austin and Raleigh.

Suburban and exurban areas are predicted to do better than their downtown counterparts, and the economists expect them to retain their heat over the next 12 months. On the flipside, they think vacation areas are most likely to see price declines.

The direction of rent growth

Rent growth should remain strong in the short term as high home prices keep many would-be first-time buyers in the rental market, the economists predict. Over the next 12 months, they think rent growth will outpace overall inflation, the stock market and home values. However, the panel expects the stock market to rebound over the next three years, and outpace growth in home prices and rents as overall inflation cools.

The panelists predict an average of 5.4% rent growth throughout 2023 – lower than the 8.6% annual growth they expect to see by the end of this year, but still higher than what Zillow data shows to be just under 4% annual growth in the years prior to the pandemic.

The demand for rentals has already spawned more supply in the pipeline. Builders responded to declining home purchases by ramping up construction on multifamily units, bringing starts to their highest level in years.

Home price appreciation

The panel of economists expect a home-price appreciation rate of 9.8% – up from 9.3% in a previous survey – but all 107 survey respondents project a home price deceleration in 2023. The share of panelists who believe their long-term outlook might be too optimistic jumped up to 67% from 56% last quarter.

“U.S. home price appreciation is clearly easing up in response to the historic surge in mortgage rates,” says Terry Loebs, founder of Pulsenomics. “Our expert panel’s mean projections indicate that residential rent price growth is expected to outpace headline CPI inflation over the coming three years and exceed home price growth through at least 2025. Despite softening house prices, this implies that affordability hurdles for prospective first-time homeowners will remain high and persist for years to come.”

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