It is that time of year again when real estate experts are trying to understand what is in store for the housing market in 2023. As you may all recall, in the first half of 2022, with mortgage rates in the 3-4% range, most houses sold in a matter of days, with multiple offers, waived contingencies, and buyers paying over the asking price.
In the second half of 2022, inflation, rising interest rates, as well as domestic & international uncertainty deeply impacted the US real estate market. As a result, the number of home listings started to dry up and more buyers asked for concessions from home sellers.
Overall, 2022 marked the beginning of the end for what was an unprecedented seller’s market and buyers went from the Fear of Missing Out (FOMO) to the Fear of Getting Stuck (FOGS).
As of today, while it is too early to anticipate how the real estate market will evolve in 2023, it is clear that two key factors will play a crucial role: The inventory levels (number of homes for sale) and the buyers buying power AKA affordability.
1). The inventory challenges
Low inventory levels are expected to persist in 2023. Homeowners who bought or refinanced during the pandemic at a very low rate will most likely stay put in 2023.
Moreover, homeowners have accumulated lots of home equity over the past couple of years which may now decrease due to the correction in home prices expected to happen in 2023. They will likely wait to see how their equity evolves before making a move.
We should also not forget that some homeowners already tapped into their home equity lines (HELOC) to pay down credit cards or make up for a liquidity shortfall. By doing so, they have increased their debt level making it easy to understand why they might not move in the near future.
The pool of buyers who have the means to buy a home at the price the sellers want has shrunk since the second half of 2022, especially for first-time homebuyers looking to purchase their first home with a low-down payment. As a result, some homeowners are converting their homes to short-term rentals rather than selling for fear of not selling them at the price they want.
Finally, some sellers expect more competition, longer sale timelines, and harder negotiation with buyers, which is likely to deter them from putting their property on the market.
2). The affordability uncertainty
Mortgage rates are the “lifeblood” that drives home sales. When interest rates go up, purchasers' buying power decreases.
Some housing experts estimate that mortgage rates have likely reached their peak and expect rates to fall further before stabilizing this year. That said, they still remain cautious given the past year’s extreme fluctuations and economic uncertainty.
In a recent Forbes article, George Ratiu, Realtor. com’s Director of Economic Research outlines that “with inflation still north of 7% and the FED committed to keeping increasing the funds' rate over the next few months, the mortgage market is not out of the woods, and we may still see rates rebound back above 7% before the end of the year.”
In the same article, Compass U.S. Region President Neda Navab states that "there have been signals that mortgage interest rates may be at or near their peak, given recent encouraging news around inflation and a corresponding drop in the U.S. Treasury yields that help set mortgage rates. A sustained drop could push mortgage rates into the 5% range late in the second quarter or the second half of 2023, but that’s definitely not guaranteed.”
Various financial and real estate organizations such as the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) envision that long-term rates will end in 2023 between 5 and 6% providing inflation remains under control.
3) Real estate market trends in 2023
First and foremost, the current real estate market has nothing to do with the so-called “2008 Housing Crash”, for a simple reason: There is no surplus of homes for sale.
Many home buyers have already found ways to get around the rise in interest rates by getting concessions from sellers and also using rates “buydown”, i.e. paying discount points at closing. For instance, a “1-0 Buydown” allows buyers to get an estimated 1% reduction in the interest rate during the first year of the loan. A “3-2-1 Buydown” will allow buyers to get an estimated 3% reduction in year one, 2% in year two, and 1% in year three.
Adjustable-rate mortgages are also in vogue, enabling buyers to partially compensate for the recent decrease in housing affordability.
To wrap, no matter what you will hear or read about the real estate market at a macro level, think in terms of risk management and make informed decisions based on your personal situation with the help of your Realtor. Overall, flexibility and a healthy dose of patience will help put you on the path to success.