Real estate outlook 2023, how to manage a real estate bubble: UBS

  • Major US cities appear to be out of bubble territory, according to a recent UBS report.
  • But house prices could soon come under pressure as supply increases and demand drivers dry up.
  • UBS’s Matthias Holzhey shared his outlook for the US housing market in 2023.

The sky may not be falling for the US housing market yet, but home values ​​will soon begin to fall, a new report from UBS warns.

“Prices seem overvalued,” Matthias Holzhey, head of Swiss real estate at UBS Global Wealth Management, said in a recent interview with Insider. “They seem too high, even compared to pre-pandemic levels.”

Holzhey is no stranger to spotting bubbling real estate markets. Since 2015, he has authored the annual UBS Global Housing Bubble Index. In this year’s report, released in October, four of the largest US cities – New York, Los Angeles, San Francisco and Boston – were firmly rooted in “overvalued territory” but were not considered to be at risk of being bubbles.

UBS real estate bubble card

UBS Global Wealth Management

But that doesn’t mean American homeowners have nothing to worry about. The report did not look at all markets, so other cities could still see rapid price declines, as Canada is currently experiencing.

A repeat of the housing market crash of 2008 is not on the cards, according to Holzhey, although he thinks U.S. home prices are set to decline for four straight quarters. The only question is: How much?

“If income levels are sustainable and then continue to grow, then I think they’ve still peaked, but house prices won’t have to return to pre-pandemic levels,” Holzhey said. “But in the case of a recession, it can lead to a decline – easily having 20% ​​decline – but that’s not the base case.”

Home prices are much more likely to fall 10-15%, Holzhey said, but he added that even a more modest decline is no guarantee. He noted that this is his view and not his company’s official call.

How to Navigate the Housing Market in 2023

There are four other key drivers of demand in the housing market, Holzhey said: revenue growth, risk asset returns, interest rateand psychology.

The first two points are attributable to the wealth effect, since the more money people make at work or on the stock market, the more they are willing and able to spend on a home. Another determining factor of what buyers can afford is interest rates, which have risen this year and therefore made it more difficult to buy a home. Psychology in this context means people’s propensity (since the start of the pandemic) to spend more time at home, which has changed where some people want to live.

Three of those four demand drivers appear to be negative heading into 2023, Holzhey said. Revenue growth has been above average, but has not kept pace with inflation and is expected to fall, a historically bad year as the stock market wiped out trillions in savings and mortgage rates soared. Meanwhile, homebuyer psychology is too difficult to predict, Holzhey said.

Consider the supply that is coming in quickly and “it’s hard to be optimistic” about where home prices are headed, Holzhey said — at least from a homeowner’s perspective.

For hopeful homebuyers, however, a drop in exorbitant home prices is long overdue. But they too have to be careful what they wish for. Homebuyers dream of closing a property after prices drop and just before they rebound, but buying early in a stock market crash would be a nightmare scenario for those who have patiently waited to close a home.

Historically, it’s virtually impossible to pinpoint the timing of a purchase in any market — especially real estate — Holzhey said. Pinball machines can play with strategic buying and selling, but it’s risky for those who live in the home they’re buying to play the waiting game, according to Holzhey.

However, today’s real estate market bears little resemblance to the markets of the past. That’s why, given the abnormally high uncertainty in the market as supply rises and demand drivers fade, Holzhey said homebuyers waiting for prices to fall could see their patience pay off.

“I think prices are going to come down over the next four quarters,” Holzhey said. “So it may make sense – an exception – to wait.”

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