San Francisco Chronicle - (Sunday)
A look back at 2023: the year the housing market froze over
This year will go down in history as one in which the housing market came to a standstill.
As 2023 comes to a close, Realtor.com wanted to look back at this year of real estate extremes. High home prices and mortgage rates led to few homes going on the market and even fewer sales. Buyers couldn’t afford to buy, sellers couldn’t afford to sell — and everyone was frustrated.
Put another way, 2023 was the year the housing market froze over.
“It was the market that worked for nobody,” says Realtor.com Chief Economist Danielle Hale. “It was a year with a lot of fencesitting.”
So what went wrong? Well, mortgage interest rates kept climbing. The higher they went, the more buyers were priced out, especially first-timers. Meanwhile, the housing shortage didn’t improve as the higher rates resulted in more would-be sellers deciding to stay put and hold onto their low mortgage rates.
“Higher mortgage rates are the dominant story for the U.S. housing market in 2023,” says Len Kiefer, deputy chief economist at Freddie Mac. “Potential new buyers are coming into a very cold market.”
Not surprisingly, the number of existing-home sales dropped in 2023 as the market contracted. Sales fell nearly 19.1% from 2022 and about 33.5% from 2021, according to Realtor.com 2023 sales predictions and National Association of Realtors® data. (These sales numbers don’t include new construction.)
This year is on track to have the fewest existing-home sales since 1995! That’s despite all of the pent-up demand from aspiring buyers eager to get into a home of their own.
“A lot of people stayed on the sidelines,” says Hale.
So what happened in 2023?
Let us list all of the things that went wrong.
How high mortgage rates paralyzed the 2023 housing market
The high mortgage rates that wreaked havoc on the housing market were a byproduct of the U.S. Federal Reserve hiking up its short-term interest rates to combat inflation. When the Fed jacked up its rates, mortgage rates generally followed, although they were volatile throughout 2023.
The year kicked off with mortgage rates in the mid-6% range, according to Mortgage News Daily. That was a promising start to the new year as rates had topped 7% in fall 2022 before coming down.
However, buyers’ relief was short-lived. By early March of this year, rates had topped 7% before
falling about a percentage point a month later. Rates kept moving up and down, and by mid-October they topped 8%. They’ve since come down into the low 7% range.
“Mortgage interest rates have backed off in the last few weeks,” says Kiefer. “But we’re up threequarters of a percentage point from where we were a year ago.”
These might seem like incremental changes, but even small movements in rates can have an outsized impact on buyers’ budgets. The difference between a 6.5% rate and an 8% one is about $350 a month. That adds up to nearly $4,200 over a year of mortgage payments and more than $125,000 over the life of a 30-year loan. (This assumes buyers put down 20% on a medianpriced home of $428,000.)
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Katie Cessna, 31, and her pharmacist boyfriend were forced to suspend their home search in the Indianapolis area after they lost six bidding wars and rates had topped 7% this summer. As rates rose, their home budget shrunk.
“We could have gotten a home, but it wouldn’t have been in the area we wanted and it wouldn’t have met the things we were looking for,” Cessna told Realtor.com this fall. She and her boyfriend decided to rent until rates come back down again. “We’re both bummed for sure.”
The number of homes going on the market dried up
As rates continued to climb, the number of existing homes going up for sale dried up.
Real estate professionals threw around the buzzy phrase “lock-in effect” to explain the phenomenon
where homeowners were loath to list and give up their low rates, especially if they were planning to buy new homes that would come with a higher rate.
Many “homeowners said, ‘No thanks. I’ll wait it out and make do. … That low rate is just so much to give up,'” says Kiefer.
About 90% of homeowners with a mortgage have a rate below 6%, Hale notes. That helps to explain why there were nearly 15.2% fewer new listings that came on the market in the first 11 months of 2023 compared with the same period in 2022, according to Realtor.com data.
“Making a move is costly, so homeowners are only going to make a move if something is forcing them to make a change,” says Hale.
Home prices refused to come down
Many real estate experts predicted that 2023 was going to be the year that home prices finally tumbled down. They had risen so much over the past few years and, combined with higher mortgage rates, they strained the budgets of buyers.
But while the double-digit price increases experienced during the COVID-19 pandemic came to an end, prices this year still edged up.
The median home price dared to go up 2.1% year over year, to $428,000 in 2023. (The data is from January through November using the most recent Realtor.com listing data.) That’s a new record.
That’s because buyers were still forced to compete for a very limited supply of homes for sale. So when a move-in ready home in a desirable area came on the market at a relatively affordable price, buyers bid up the price in multiple-offer situations.
Prices started at a median of $403,333 in January and steadily rose in the first half of the year. They peaked at $445,000 in June. As they often do in the colder months, prices fell and hit $420,000 by November, according to the most recent Realtor.com data.
First-time homebuyers were affected the most by the combination of high prices and mortgage rates. They couldn’t use the proceeds from a previous sale to finance the next one. And as they tend to be younger, they often don’t yet earn the higher salaries that could help them compete with repeat buyers and investors.
“It’s very hard to buy a first home in today’s market,” says Hale.
Medical writer Janice Lin told Realtor.com this fall that she fears that she and her boyfriend “missed the boat” on purchasing their first home. They live in pricey San Jose, CA, in the heart of Silicon Valley, and Lin expects they will have to move to a cheaper area to eventually become homeowners.
“It does feel a bit hopeless,” she said.
Home sales dropped sharply
Not surprisingly, with fewer homes on the market and all of the affordability challenges, there weren’t as many sales.
Regionally, sales fell the most in the West, where home prices tend to be highest. They slipped the least in the South, where new construction is strong and sellers were more willing to list their properties.
The number of home sales fell 19% year over year in the South, 20% in the Midwest, 24% in the Northeast, and almost 26% in the West. (The sales figures compared January through October of 2022 with the same period in 2023.)
“Far fewer home sales took place, certainly compared [with] the pandemic-era frenzy, but also compared to more normal years,” says Hale.
Painful rent hikes ended in much of the country
This year wasn’t a good one for renters, but it wasn’t terrible either. After years of landlords jacking up rents by double digits, the surge finally abated.
Monthly rental prices increased by just $6 nationally from January through October, according to a Realtor.com analysis. That brought the typical rent up to $1,736 a month.
“It’s not a huge amount of relief, but it’s something after more than a year of double-digit rent increases,” says Hale.
Perhaps more important for tenants is that rental prices have slipped, just slightly, for the past six months in a row. The cheaper prices are due to more units in newly constructed apartment buildings becoming available. That extra supply has forced some landlords to keep prices stable or even lower them to compete for
renters who had more choices this year.
New home construction stalled
New construction increasingly became a lead player in the 2023 housing market. Too bad there wasn’t enough of it to go around.
When buyers couldn’t find homes on the resale market, they turned to the builders who found ways to put up smaller, more affordable homes this year. Many of the larger builders were able to contribute to buyers’ closing costs, offer upgrades, and buy down mortgage rates (for either the first few years of a buyers’ loan or the full term).
However, the number of housing starts dropped about 10% in 2023 compared with the previous year, according to the National Association of Home Builders. (Housing starts are a measure of homes that builders have begun
construction on but have not yet completed.)
Builders began 2023 strong but waned in the second half of the year.
The number of new apartment buildings going up also dipped as higher interest rates made it harder for builders to obtain financing in the second half of the year. Apartment construction remained strong in the outer suburbs and rural markets, but it fell in big cities and was flat in close-in suburbs.
“It was definitely a year that cooled off from the post-COVID housing boom,” says Robert Dietz, chief economist of NAHB. “That level of new housing production is not enough to reduce the existing housing shortage.”
“A Look Back at 2023: The Year the Housing Market Froze Over” first
appeared at www.realtor.com.