Looking back over 2022 and what actions have been taken to fight inflation, we can form some decent 2023 real estate predictions. So join me in running down the likely scenarios we will encounter over the next year.
There was one factor that drove the real estate market last year more than any other: increases in mortgage rates.
While some market sectors have been slow to respond to the Federal Reserve’s interest rate hikes in March 2022, the housing market has responded quickly.
Since the primary challenge for homebuyers has moved from availability to affordability, demand and price appreciation have tapered. The higher mortgage rate environment has been painful for many buyers and sellers, but it should ultimately lead to a more balanced and stable real estate market in the long run.
In 2023, what should we expect? Will mortgage rates continue to rise? Will home prices crash? While this is a challenging real estate period to forecast, here are some industry experts’ predictions for the U.S. housing market in the near future.
LESS FLUCTUATION IN MORTGAGE RATES
As of January 20, 2022, 30-year fixed mortgage rates surged from roughly 3% to around 7%. According to Rick Sharga of real estate data company ATTOM, “We’ve never seen rates double so quickly.”2
Compared to last year, economists predict a less dramatic shift this year.
Nadia Evangelou, senior economist for the National Association of Realtors, shares three possible mortgage rate scenarios with Bankrate:3
She predicts that rates could reach 8.5% if inflation continues to rise, forcing the Fed to raise interest rates repeatedly.
Inflation decelerates and mortgage rates average 7 to 7.5% for the year.
By the end of the year, mortgage rates could drop closer to 5% as a result of rising interest rates.
According to Real Estate.com, mortgage rates will average 7.4% in 2023, then drop to 7.1% by year’s end.4 According to Evangelou, the 30-year fixed rate will decline steadily throughout the year, averaging 6.2% in Q1 and 5.2% by Q4.5. The Mortgage Bankers Association, however, projects something closer to scenario #3.
Despite being somewhere in the middle, Fannie Mae economists predict a moderate recession for the U.S. economy in a recent press release. However, in their December Housing Forecast, they project that 30-year fixed mortgage rates will only fall half a point from 6.5% in Q1 to 6.0% in Q4.7.
Fannie Mae Chief Economist Doug Duncan said demographics remain favorable for housing, so the sector is well positioned to help lead the economy out of what is expected to be a brief recession.6
It can be difficult to predict where mortgage rates are headed, so instead of attempting to guess the market, focus on finding a home that fits your needs and timeline. There are many ways to make it more affordable too—adjustable rates, points, buydowns—all of which you can look into with a trusted mortgage professional who can provide advice and outline all of the possible options.
THE SALES VOLUME WILL FALL AND THE INVENTORY WILL GO UP
In the past few years, we have experienced a home-buying frenzy. While the desire to own a home remains strong, higher mortgage rates have made home ownership unaffordable for many.
According to many economists, the number of home sales will decrease this year, which will result in an increase in listing inventory and days-on-market. However, there is wide variation when it comes to specifics.
National Association of Realtors Chief Economist Lawrence Yun predicts a less extreme dip of 7% in 2023, with a rebound of 10% next year, according to Fannie Mae economists.
A deceleration in home sales is likely to continue as high home prices and mortgage rates limit the pool of eligible home buyers, according to Realtor.com Chief Economist Danielle Hale. According to her, existing home sales will decline 14.1% in 2023. This drop in sales is expected to result in a 23% increase in inventory levels in this year, giving buyers more choices.9
However, given the severe lack of housing supply, even with a double-digit increase, the market is expected to remain relatively tight and below pre-pandemic levels. The level of inventory in 2023 will likely fall roughly 15% short of the average in 2019. Hale points out: “It’s important to keep historical context in mind.”9
What does it mean for you? If you’ve been frustrated by a lack of inventory in the past, you may be able to find the perfect home in 2023. Buyers today have more leverage than they’ve ever had. If you are interested in finding current and future listings that match your needs, contact us today.
If you’re hoping to sell, you may want to act fast; rising inventory levels will mean increased competition. In order to maximize profits, we can help you determine the current market value of your home. Please contact us to schedule a free consultation.
PRICES OF HOMES WILL STAY RELATIVELY STABLE
Will home prices drop in 2023? The consensus of most experts is that nationally, things will stay relatively stable.
According to Yun at a November conference, “for most parts of the country, home prices are holding steady since inventory is extremely low.”. However, I am not confident that markets that had extreme value increases will not also experience more severe drops in value when compared to the rest of the nation. Of course, this idea would directly effect what we might expect in Santa Clara County, specifically our South Valley markets of Morgan Hill, San Martin and Gilroy.
The average median home price in 2023 is expected to rise by 1% nationally, with certain markets experiencing greater appreciation and others experiencing a decline, according to Yun. A similar prediction is made by economists at Fannie Mae, who predict a 1.5% decrease in the Home Price Index.7
According to Hale, U.S. home prices will rise by 5.4% this year, while Morgan Stanley forecasts a 7% drop from the peak in June 2022.
The housing market crash of 2008 is highly unlikely to happen again, according to many economists. In our current market, the factors that caused home prices to plummet during the Great Recession aren’t prevalent—specifically lax lending standards and an excess of inventory.10 Thus, home values are expected to remain relatively stable.
If there’s uncertainty in the market, buying a home can feel scary. However, real estate is a long-term investment that has proven to appreciate over time. You can also find the best deals in slower markets, such as the one we’re experiencing right now. Contact us to discuss your goals and budget. Our team can help you make an informed decision about when to buy.
If you intend to sell this year, you should plan carefully to maximize your profit. Contact us for recommendations and to find out what your home could sell for.
THE RENT PRICES WILL CONTINUE TO SOAR
Many parts of the country could continue to see “above-average” rent prices due to affordability challenges for would-be buyers, inflationary pressures, and a shortage of housing. According to the Federal Reserve Bank of Dallas, rental prices are expected to rise 8.4% in May before slowing down later in the year.12
“U.S. renters will continue to face challenges in the coming year due to limited supply and excess demand, which will keep rents on the rise.”9 At a national level, we forecast rent growth of 6.3% in the next 12 months, slightly ahead of home price growth and historical rent trends.”
According to Jay Parsons, head of economics for rental housing software company RealPage, there’s some evidence of a slowdown in demand, suggesting that rent prices could be tapering. In spite of the fact that analysts agree that it’s unlikely that rental prices will go back to lower levels before the pandemic, he predicts that market rents will rise only 3.3% this year.
Rent prices are expected to keep climbing, but you can lock in a set mortgage payment by buying a home instead. Contact us for a free consultation.
Call us today to get started on your investment property search if you’ve ever considered purchasing a rental property.
WILL 2023 BE A GOOD YEAR TO BUY A HOUSE?
This will depend on your local market. However, in general, it appears that in many areas in our local South Valley market, we will see drops in prices that could be an excellent opportunity for buyers. This will also depend on what mortgage rates are doing. While the national trend may be more stable – as the experts seem to believe – our local market is likely to see bigger dips than the nation overall will.
OUR TEAM IS HERE TO GUIDE YOU
As local market experts, we can help you understand the challenges and opportunities in your particular neighborhood and how they might affect sales and home values. National real estate forecasts provide a “big picture” outlook, but real estate is local – particularly here in the South Valley.
We will help you develop an action plan to achieve your real estate goals in 2023 if you’re considering buying or selling a home.
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You should consult the appropriate professionals for advice regarding your individual situation. The above information is intended for informational purposes only.
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