washington d.c.
CNN
—
Last year was a frantic race in the US real estate market. Mortgage rates have doubled and sales fell, triggering the longest month-over-month decline on record. Many potential buyers and sellers looked sideways.
Throughout 2022, the Federal Reserve has raised its benchmark interest rate at a record pace to slow the economy and fight high inflation. Housing has borne the brunt of the impact, as the most interest rate sensitive sector of the economy. The Fed’s actions, however, had the intended effect, with housing affordability deteriorating and demand falling, resulting in lower sales and slower annual price growth.
So what does the real estate market have in store this year? Home prices rose almost 40% between spring 2020 and spring 2022, which is about a decade of price increases in just a few years. Will what has gone up also come down?
Housing experts and economists disagree.
Economists’ predictions range from a price increase of around 5% this year, according to Realtor.com, up to a 22% decrease peak in 2022 to gross, according to John Burns Real Estate Consulting.
What happens with stocks, mortgage rates and the economy in general will likely determine the strategy adopted by the market.
“Mortgage rates are really critical to the trajectory of the housing market over the year ahead,” said Jeff Tucker, senior economist at Zillow. We ensure that affordability improves gradually. This should breathe some life back into the market.
Another thing he’s watching is the inventory of homes for sale, which is already almost back to its 2020 level, he said.
“Yeah, things have cooled down in the housing market, but we don’t have a bunch of homes for sale,” Tucker said. “That’s the main thing that protects us from runaway price declines.”
Zillow forecasts nationwide home prices to decline between 1% and 4% from levels last June, the 2022 peak.
“Seeing prices that hold steady at 1% or 4% down puts us on the more bullish side for price changes from the forecasters out there,” Tucker said.
But he said the tight stock and strong unmet demand to buy a home suggests to him that, if mortgage rates come down a bit, there will be more movement in the market.
He said more inventory would then become available from locked-in homeowners clinging to their ultra-low mortgage rates of the past two years.
“Homeowners where lower mortgage rates give them permission to sell and move, then they will be buyers,” Tucker said.
Prices for National Association of Realtors projects will increase by less than 1%, reaching a median price of $385,800 by the end of 2023. But the NAR warned that even this small change masks great regional variability.
“Half of the country may see small price increases, while the other half may see slight price declines,” said NAR chief economist Lawrence Yun. “However, California markets may be the exception, with San Francisco, for example, likely to see price declines of 10% to 15%.”
Regions that have seen the biggest price increases will also see some of the biggest declines, Yun added.
As a result, the search for affordability is driving many potential buyers to lower-cost metropolitan areas where the cost of a home can fit the budget of more families, said George Ratiu, director of the economic research at Realtor.com.
“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive areas are drawn to strong local economies and median prices, which in some cases are still below $300,000,” Ratiu said.
The days of 3% or 4% mortgage rates are over for the foreseeable future, but rates will likely settle below the historic pre-pandemic rate of 8%, according to the consensus of housing economists.
But first, inflation must subside. Inflation data at the end of 2022 was promising, but there is still some way to go.
“Inflation expectations themselves play into mortgage rates and impact monetary policy,” Tucker said. “The Fed wants to wait and see inflation come down before lifting the brake on rate hikes. A growing consensus is to expect another step in the pace of tightening.
Although the Fed does not directly set the interest rates that borrowers pay on mortgages, its actions influence them.
Mortgage rates tend to follow the yield of 10-year US Treasury bills. When this rate increases, the 30-year fixed rate mortgage also increases. When the Treasury rate drops, mortgage rates also drop.
In November, as mortgage rates began a six-week slide, the median monthly mortgage payment fell 1.8% to $1,977 from $2,012 in October, according to the Mortgage Bankers Association.
While mortgage rates are rising againthis affordability improvement could repeat itself in 2023 when and if rates drop.
Forecasters, again, predict a wide range of rate moves in 2023. While Realtor.com predicts rates for the 30-year fixed rate loan to be above 7% in 2023, Zillow predicts rates Closer to 6% this year, ending the year between 5.5% and 6%.
After the 30-year fixed mortgage rate eclipsed 7% at the end of 2022, Yun said he expects it to stabilize at 5.7% as the Fed slows the pace of rate hikes in response to slowing inflation.
In 2023, we could see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong second half for buyers, said Leonard Steinberg, corporate broker at Compass in New York.
“Potential buyers who exited the market at the end of 2022 cannot and will not stay on the sidelines forever, especially given the competing demands of first-time buyers looking to enter the market and retirees who are looking to relocate or downsize, Steinberg says.
Chronic underconstruction of new homes is also expected to remain a challenge across all market segments as builders grapple with the challenge of balancing a short-term decline in demand with the long-term need for more new housing, he added.
“People everywhere need to buy and sell homes every day, and those buyers and sellers will show up to compete throughout 2023 and beyond as the market continues to rebalance and normalize. “Steinberg said.
It is likely that there will be a return to the traditional seasonality of the real estate market, in which inventories tend to rise in February and continue throughout the summer. During this time, prices often peak in May or June and prices and sales tend to slowly decline until the end of the year.
“The spring market will be busier and more competitive for buyers, while the next couple of months will be the calm before a busier time,” Tucker said.
Buyers are likely to pay more during the spring selling season, when homes tend to sell at a seasonal price, because that’s when most buyers try to.
Potential buyers looking to drive prices down may be holding their breath in 2023.
“The big surprise for a lot of people might be that the market has had a really dull year,” Tucker said. It would be a big change of pace. A simple, boring, vanilla year in the housing market would be a wonderful surprise.
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