Re-Setting Expectations in 2023
The red-hot housing market of the past 2 ½ years was characterized by sub-three percent mortgage rates, fast-paced bidding wars and record-low inventory. But more recently, market conditions have done an about-face. Consumers — and real estate professionals — who have been watching the pandemic-fueled housing market could be feeling distraught by the news about higher mortgage rates, slower sales activity and dampening price pressure.
However, instead of being dejected, now is the opportunity for everyone to become re-educated about what a “typical” housing market looks like. Now it’s important to pay attention to local market conditions, as the housing market correction underway is going to look very different depending on where you are located.
The national median home price rose by more than 40% over the past three years, but in some local markets, prices increased even faster. The run-up in home prices was driven by rock-bottom mortgage rates and pandemic-fueled demand.
As the pandemic took hold in the spring of 2020 and the Federal Reserve cut the federal funds rate to near zero, the average rate on a 30-year fixed-rate mortgage fell to below 3%, the lowest rate on record. But now, the Fed has shifted to raising rates to combat inflation and mortgage rates have set another record — this time for the fastest increase in more than 40 years.
Average mortgage rates jumped above 7% in November and have settled around 6.5% at the end of 2022. Rates should continue to fall in 2023, but the decline in rates will be much slower than the run up. We are forecasting the rates will fall modestly, reaching 6% by the end of the year. This is much higher than during the pandemic, but it is still low relative to historic standards.
Bright MLS’ forecast suggests that there will only be 4.87 million home sales nationally in 2023, a decline of about 6% compared to 2021, and the lowest level of home sales in nine years. Some of the 2023 slowdown is a result of homebuyers pushing their home purchase forward to take advantage of low rates.
Six percent mortgage rates have also priced some buyers out of the market. But relatively low inventory will be the primary driver of subdued transactions. Inventory has been rising in recent months but there is still only three months of supply nationally. Typically, we would need four to five months of supply to have a so-called “balanced” market so it will remain a seller’s market in most places.
The national median home price is expected to be relatively flat in 2023 amidst rebounding demand and low inventory. But the national figures do not tell the whole story. Local markets that are more affordable, and where the local economy is strong, will see stronger price growth in the year ahead. Midwest metros like Minneapolis, St. Louis and Indianapolis provide opportunities for home shoppers who are mobile and looking for bargains. Prices could rise 5% or more in these more affordable markets in 2023.
Higher-cost markets that lack affordable housing are at greater risk of price drops. California markets, including Los Angeles and Riverside-San Bernardino where the median home price is more than 10 times the median household income, could see the greatest price shocks in 2023. Las Vegas, Phoenix and Austin are also markets where the risk of more serious price corrections is higher.
So, what should consumers and real estate professionals think as we head into 2023? First, realize that the frenzied pace of home sales activity during the pandemic was not typical or sustainable, nor is it good for a healthy, stable housing market. Second, know that even as the housing market resets in 2023, there have been contractions on both the buyer and seller sides.
While buyers will have more leverage in 2023, it is still going to be a challenging environment. Home shoppers should have their financing and offer strategy in place so they are ready to make a strong offer when they find the right home for them. Third, opportunities for both buyers and sellers will vary significantly across local markets.
Whether buying or selling, it is more important than ever to understand local housing market conditions. People should not let national media headlines tell them whether it is a good time to buy or sell. It is important to set expectations to reflect current, local market conditions rather than what the market has been doing during the very unusual past two to three years.
To contact the author of this story:
Dr. Lisa Sturtevant at lisa.sturtevant@brightmls.com
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com
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