Housing market hangover
Experts say home prices, rents, inventory, interest rates will not move much in 2023
At the beginning of the pandemic, office workers were liberated from their commutes but found themselves stuck at home and hungering for space. Many Americans went on a home-buying frenzy, fueled by cheap debt and an insatiable urge to move. The result was a run-up on home prices at a pace never seen in U.S. history.
Then the party ended with a thud last spring when mortgage rates doubled in a matter of months. Buyers evaporated from the market, unable to pay the staggering cost of buying a home in this new reality. And those who had planned to dip into their stock portfolios to fund down payments saw their fortunes dwindle as stock prices tumbled. The housing market’s anemic inventory did not recover, partly because sellers stayed put.
“The pandemic created a perfect storm for driving up housing prices,” said Ruben Gonzalez, chief economist for Keller Williams, and “2022 was the aftermath of that storm.”
Get ready for one hell of a hangover. The year ahead may continue to feel like the morning after an epic party: slow to start, with home prices, rents, inventory and interest rates not moving much at all, according to interviews with economists, analysts and real estate and mortgage brokers. Lingering economic uncertainty, including a rocky stock market, could translate to a housing market waiting for something to happen.
The housing market has “basically been in hibernation since late summer,” said Daryl Fairweather, chief economist for Redfin, which anticipates 16% fewer home sales in 2023 compared with 2022, dropping to the lowest level since 2011, around the time the last housing cycle bottomed out.
Sales have fallen, yet prices are largely holding. In November, home prices were up 2.6% from November 2021, while sales were down 35.1% during the same period, the largest drop in a decade, according to Redfin. A healthy housing market usually has four to five months’ supply; in November, the country had a 3.3-month supply of homes, according to the National Association of Realtors.
On Oct. 27, the 30-year fixed mortgage rate hit a high of 7.08%, according to Freddie Mac. On the week ending Dec. 22, the 30-year fixed mortgage rate was 6.27%, more than twice what it was the same week in 2021.
For first-time homebuyers, the current conditions are particularly bleak: Home prices skyrocketed 45% from December 2019 to June 2022, according to Standard & Poor’s CoreLogic Case-Shiller Home
Price Index.
There has not been much relief for renters, either, who have endured stunning increases that gobbled up their savings. Rents rose 4.7% between January and November 2022, according to Apartment List.
No risk of a 2 0 0 8 repeat
For current homeowners, the end of the party is not so bad. Most have accrued enormous home equity simply by living there. Those who bought or refinanced are likely the beneficiaries of historically low interest rates, too.
Less than 1% of homes are in foreclosure, a fraction of the 4% of homes in foreclosure at the peak of the 2008 housing crisis, according to ATTOM, a real estate data company.
Of the homes that are in foreclosure, 93% have equity, according to ATTOM.
Rick Sharga, an executive vice president of market intelligence at ATTOM, said there is “almost no risk of a repeat of 2008” when millions of Americans, many with subprime mortgages, defaulted on their loans, glutting the housing market with inventory and causing home values to crater as the country sank into a deep recession.
Will home prices budge?
Whether home prices will fall, and by how much, depends on who you ask. Redfin is predicting prices will fall by 4% in 2023. Gonzalez at Keller William is anticipating a peak-totrough drop of 10%. The
National Association of Realtors anticipates prices overall won’t move at all.
What will ultimately happen in 2023 may have a lot to do with where you live. Markets such as San Francisco, Phoenix and Las Vegas might see noticeable price drops, while other markets, such as Chicago, Milwaukee and Pittsburgh, could see prices rise.
Will interest rates budge?
Although mortgage rates aren’t directly tied to the Federal Reserve’s actions, they are influenced by them. In December, the Federal Reserve raised the federal fund rate at a slower pace than it had earlier in the year. While rates are expected to continue to rise in 2023, conditions could change.
Some real estate economists are projecting that mortgage rates will start to fall sometime in 2023, perhaps by the second half of the year. Lawrence Yun, chief economist for the National Association of Realtors, thinks mortgage rates peaked in November, and will hover around 6%, or edge lower, in 2023.
Will new homes get built?
At the end of 2020 the country was short 3.8 million units of housing, according to Freddie Mac. While construction of single family homes started to pick up during the pandemic, builders pulled back in 2022, with housing starts down 16% in November 2022 from the same time a year ago, and building permits down 22% during the same period, according to U.S. census data.
“The pipeline is essentially shrinking,” said Robert Dietz, chief economist for the National Association of Home Builders, which is expecting single family home starts to fall by another 15% to 20% in 2023 before beginning to rebound in 2024.
The year ahead for renters
Through 2021 and the first half of 2022, renters found themselves at the mercy of a relentless market. Still, the market has been steadily cooling for months. From the beginning of September to the end of November, rents saw the sharpest threemonth drop since 2017, when Apartment List first started tracking such data.
The national median rent is now $1,356 a month, according to Apartment List. Heading into 2023, renters will have more options than they’ve had in a long time, with new housing units coming onto the market and less competition. Rental construction was up almost 18% from January through November 2022 compared with the same period in 2021, according to Dietz of the National Association of Home Builders, adding that construction is expected to slow significantly in 2023.