As this will be my last real estate article for the current year, I thought it might be interesting to review what transpired during 2022 which might have impacted real estate and our overall economy. Since real estate is one of the largest influences in the U.S. economy, it’s easy to understand how the health of real estate and the economy are related.
Mortgage interest rates started the year in the mid-low 3% and doubled to over 7% in October before settling down in the current mid 6% range. Its easy to understand that if the cost of borrowing mortgage money increases dramatically that it would marginalize some of the buyer pool who either can no longer afford to purchase or who choose not to compete thinking home prices are going to drop significantly in the coming year.
Real estate prices had skyrocketed over the previous two years pushing our local market values upward of 36-40% during that time. In May, rapidly rising real estate prices started cooling and now in December sales volume is down markedly in areas of our market.
Some experts predict home prices will drop off by 10-15% from previous highs so many buyers have decided to sit on the sidelines until there is evidence to indicate that the market has hit bottom and is on an upward price vector. People don’t want to buy with the risk that prices will continue to fall, but they also don’t want to miss the bottom then pay more for a property either. It’s a tough job of market timing, but in their defense, no one wants to catch a falling knife.
The Federal reserve increased the overnight funds rate six times this year attempting to tame inflation (currently near a 40-year high). Overnight funds rate impacts consumer credit (auto purchases, consumer goods, cost of purchasing groceries with credit card) and Federal Reserve Chairman Powell wants to slow down consumer spending and the economy but avoid a recession. Another tough job of timing and finesse; slowing down consumer spending which is causing inflation without crashing the economy.
Russia invaded Ukraine sending shock waves to the fiscal markets and economies around the world. Worldwide, free countries are sending support and military equipment to Ukraine which has increased those country’s spending on military hardware and added inflationary pressures in the free countries around the world. Britain’s inflation is currently over 10%.
With real estate prices falling, I-buyers lost huge sums in the third quarter which pushed several companies out of the I-buying arena due to the difficulty of forecasting real estate prices in a softening market. The founder and CEO of Open Door was replaced due to a third quarter loss of nearly $1 billion.
I-buyer investors made incredible sums during the rapid and historic rise of the stock market these past several years, so they put money into the I-buyer programs. But in a victory for consumers, I-buyer companies have less available funds to purchase real estate due to the downturn in the stock market.
Forecast: experts feel that after a value reduction from height of the market experienced earlier this year that 2023 might witness a 4.5% YOY price appreciation and that mortgage interest rates should settle in the mid 5% range once inflation controls take effect toward the end of the second quarter 2023.
If you might plan on a real estate transaction in the coming year, it’s not so bleak once we get into the summer months. Smart advice is to use the time between now and then to prepare for the sale by deliberately and thoroughly determining the exact condition of your home and what fixups might be necessary to command best pricing for the shortest market time. Keep in mind that future sales will involve traditional negotiation and seller concessions to attract potentially nervous buyers.
In closing, thanks for all the feedback I have received regarding this weekly real estate article. In my very first column, I indicated the intent was to be all about information and education and, from the comments received, it sounds like there has been a degree of success achieving that stated goal.
Happy holidays and Merry Christmas and may all experience health and happiness in 2023.