Here’s how the housing market stumped Wall Street this year

For Wall Street, the housing market this year was hard to target and analysts often found their forecasts missing the mark.

Take Wells Fargo economist Charlie Dougherty, who in March expected home prices nationally to fall 4.5% this year. But by October — when mortgage rates were nearing 8% — Dougherty ditched that outlook and projected home values to instead gain 1.8% in 2023.

He’s not alone. Prognosticators at Morgan Stanley and Goldman Sachs along with economists polled by Bloomberg also found themselves playing catch-up when it came to prices, new home sales, and mortgage rates this year — often reversing directions from previous forecasts.

The revisions show that early on many underestimated the resilience of housing demand in the face of rising mortgage rates and didn’t fully realize the vise grip low rates had on potential sellers — affecting available inventory and prices.

“If I was putting myself back in early 2023 when we were writing in that report, I’d say the strength of the economy was one of the biggest factors, which helped housing activity and home prices kind of be a little bit more resilient than anticipated,” Dougherty told Yahoo Finance in an interview.

“It’s tough to predict. This is one of the challenges of forecasting these things is all the different factors.”

AUSTIN, TEXAS - OCTOBER 16: A home available for sale is shown on October 16, 2023 in Austin, Texas. Home sales have slowed as the cost of borrowing has increased and the country continues seeing record-high mortgage rates. (Photo by Brandon Bell/Getty Images)

A home available for sale is shown on Oct. 16, 2023, in Austin, Texas. (Brandon Bell/Getty Images) (Brandon Bell via Getty Images)

Home price revisions

As of October, home prices were up 4.8% year over year, according to the latest data from the S&P CoreLogic Case-Shiller national home price index, growing at the fastest clip so far this year.

That’s more in line with James Egan’s prediction this month that home prices will appreciate 4% year over year from December 2022. Still, it took the Morgan Stanley strategist some time to arrive at such an accurate forecast.

Going into this year, Egan’s crystal ball was foretelling prices would fall by 4%, rather than grow by that much. In June, he later revised his prediction, saying prices would flatline this year. In August, he noted that the brief decline in prices earlier this year would be short-lived.

“While we expect a third straight negative print in 2 weeks’ time — we forecast next month’s Case-Shiller print to be -0.2% year-over-year/+0.8% month over month — that might be the end of our brief foray into negative territory,” Egan wrote in August.

Other Wall Street banks were on the same bandwagon, expecting home prices to slide this year, including Goldman Sachs fixed income strategist Vinay Viswanathan, who predicted in March that home values would drop 6.1% year over year. In June, Viswanathan softened that outlook, anticipating just a 2.2% decline.

“The housing market has proven even more resilient than we had expected,” Viswanathan wrote. “While we are cognizant of the tailwind from tight housing supply, we expect affordability will likely stay poor, ultimately pushing prices lower in 2023.”

Viswanathan scrapped that two months later, saying prices would increase 1.8% for the year. Now, the investment bank estimates home prices to appreciate 2.0% by year-end as mortgages retreat from their recent highs.

New home sales surprise

A big reason behind the resilience in prices was the stubborn lack of inventory in the resale market, which led to buyers bidding up prices on the few homes for sale.

Many homeowners who wanted to move were financially trapped in their homes — locked in by a low interest rate they secured during the pandemic when they bought or refinanced. That rate was likely half the rate they would get if they sold and purchased another home, a strong incentive to stay put.

As a result, an interesting dichotomy took shape as the existing home sales market was ravaged by higher mortgage rates, dissuading buyers and homeowners alike. But enough buyers remained in the market and builders picked up the slack by rolling out juicier incentives for newly built homes.

Their strategy worked and caught analysts and economists by surprise in the spring.

Economists polled by Bloomberg were off by 45,000 and 47,000 units when it came to their home sales estimates for March and April as first-time buyers poured into the new-home market. The largest builders offered aggressive rate buydowns — when the builder pays up-front to reduce the interest rate on a mortgage for the buyer.

Sales spiked for the major builders in the first and second quarters of this year, topping analyst expectations and providing an about-face from the downturn builders experienced at the end of 2022.

“The spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter,” D.R. Horton CEO David Auld said in a press release in April.

“Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions,” Auld said.

Shares of the builder rallied 7% after that report.

PulteGroup soon followed with similar rosier-than-anticipated results. Toll Brothers in May also posted better-than-expected results, citing the shortage of resale homes for sale.

“This phenomenon has become a boon for homebuilders,” Toll Brothers CEO Douglas Yearley said on the company’s earnings call then.

That made homebuilder stocks a darling, too — for a while.

“It’s been a really interesting story,” Dougherty said. “The extent to which [builders] were able to continue offering those incentives even as mortgage rates went up, there’s a little bit of a surprise.”

The surprises aren’t over.

The biggest miss this year by Bloomberg’s consensus estimate just happened — and to the downside, too. The consensus estimate for new home sales in November was 690,000 units, but the actual total was 100,000 lower than that. The second-largest miss was in October, when the actual sales number was 49,000 units fewer than the prediction.

Still, expectations that mortgage rates will fall in 2024 after the Federal Reserve forecast three rate cuts next year could boost new home sales again.

Rate volatility

And that’s the crux of it.

This year’s volatility in mortgage rates is largely responsible for the unpredictable housing market. What is too high for homebuyers? What is low enough to convince homeowners to sell? What level will keep prices from rising too much?

While many housing economists and strategists expected the year to end with rates somewhere in the mid-6% range, many didn’t anticipate the wild ride to get there. In fact, rates are now close to that, ending the last week of December at 6.61%, the lowest level since May.

But before then, they rocketed to 23-year highs and prompted the chief economist at the National Association of Realtors to warn everyone to brace for 8% mortgage rates before the year closed out.

In the end, rates got as high as 7.79% in late October. That was the same time that Dougherty released projections that showed mortgage rates would land at 6.94% at the end of year, much higher than his previous forecast of 5.86% back in March.

“There’s been a lot of twists and turns,” Dougherty said. “The extent to which mortgage rates went up was the biggest surprise with inflation rising and the Fed tightening monetary policy, it was safe to assume that mortgage rates were going to remain elevated.”

Going forward, Dougherty expects to see “some improvements in terms of affordability because you’re not seeing the same rapid home price appreciation that you’ve seen in recent years, homebuyers will likely see lower mortgage rates, so what you’re looking at is a slightly more lively housing market next year.”

We’ll see.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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