Spring Brings Cautious Optimism to U.S. Housing Market

The 2023 outlook we published in January, “Staying in Place – The Post‑Pandemic Housing Market,” anticipated a challenged but resilient U.S. market generally trading sideways this year amid reduced activity and low inventory. Our expectation has been largely realized so far, with national home prices down only 3% from the peak in June 2022, according to CoreLogic Case-Shiller, and recent data have been encouraging.

Demand is down due to the shock in affordability after the sharp rise in mortgage rates in the past year. However, supply is also down as potential sellers, many of whom benefit from existing mortgages at historically low rates, are incentivized to stay put. This is occurring amid a severe housing shortage in much of the country that is likely to support prices.

Challenges remain. National affordability remains at its lowest level since the 1990s. There is potential for more significant price corrections in areas where affordability is most stretched and gains during COVID-19 were most extreme, such as parts of the West Coast and Mountain regions.

Yet an upside surprise for prices – while still not our base case – seems more plausible than it did a few months ago, given the ongoing inventory constraints and the relative pickup in activity, and despite the higher rates. Even after rising significantly, mortgage rates remain in line with historical levels, and a shallow recession could improve affordability if it’s accompanied by lower rates. From an investment standpoint, we believe senior mortgage-backed securities remain broadly attractive.