“Driving the downwardly revised forecast are affordability headwinds that have strengthened faster than expected, largely due to sharp increases in mortgage rates,” wrote the Zillow researchers. “Further risks to the outlook as well: Inventory levels remain near record lows, but have the potential to recover faster than anticipated, which could lower future price and sales volume projections.”
The fact Zillow has cut its forecast shouldn’t come as a surprise. After all, this swift move up in rates is creating a serious affordability crunch for homebuyers. At a 3.11% fixed mortgage rate in December, a borrower would owe a principal and interest payment of $2,138 on a $500,000 mortgage. That payment would spike to $2,718 if taken out at a 5.11% rate. Over the course of the 30-year loan, that’s an additional $208,800.
If Zillow is right and home prices do rise another 14.9% over the coming 12 months, it’d mark another historically strong year for home price growth. Over the past 12 months, home prices are up a staggering 19.2%. Each of those figures are outliers compared to average annual U.S. home price growth of 4.6% posted since 1987.
“Even with the downward revision from last month, these figures would represent a remarkably competitive housing market in the coming year,” writes the Zillow researchers.
“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators…prices appear increasingly out of step with fundamentals,” wrote the Dallas Fed researchers.
Both homebuyers and home sellers alike might want to take housing forecasts with a grain of salt. Look no further than the housing forecasts published during the COVID-19 recession. In the spring of 2020, both Zillow and CoreLogic published economic models predicting that U.S. home prices would fall by spring 2021. That price drop never came. Instead, the housing market went on a historic run that continues to today.