The 2023 housing market
Andrea V. Brambila
The slowing housing market has some expecting a crash in 2023, but next year will likely be more humdrum; albeit still painful as the market continues to cool before an expected uptick in 2024. Experts predict a more balanced market between homebuyers and sellers where home prices will either flatten, dip slightly or rise slightly while mortgage interest rates continue to decrease after a rapid rise this year and inventory bumps up marginally.
“The housing market has been running at a frenzied pace for the past two-and-a-half years,” said Lisa Sturtevant, chief economist for Bright MLS. “In the second half of 2022, high home prices and fast-rising mortgage rates stalled market activity. As demand dries up and price expectations are re-set, home prices in most local markets will drop from their pandemic peaks.”
According to Taylor Marr, deputy chief economist at Redfin, continued high mortgage rates are likely to make the 2023 housing market the slowest since 2011. “We expect home sales to sink to their lowest level in more than a decade in 2023 as high mortgage rates keep housing costs up and prevent people from moving; high homeowner equity and a resilient job market will stave off a wave of foreclosures.” Fannie Mae is expecting a “modest recession” in 2023 with a predicted negative 0.5% in GDP growth before the economy expands by 2.2% in 2024.
“The economy caught its breath in the second half of 2022, but that doesn’t change our expectation that it will run out of air in early 2023 via a mild recession,” said Doug Duncan, chief economist at Fannie Mae. “We expect housing to continue to slow, even though mortgage rates have come down recently. Home purchases remain unaffordable for many due to the rapid rise in rates over the last year and the fact that house prices remain elevated compared to pre-pandemic levels.
“Refinancing is not practical for the vast majority of current mortgage holders.” Danielle Hale, chief economist for Realtor.com, anticipates that everyone in the housing market, sellers, buyers, and renters “may be underwhelmed” next year in what she called a “nobody’s-market,” friendly to neither buyers nor sellers.”
“The slowdown in home sales transactions that began as mortgage rates surged in 2022 is expected to continue, leading to a moderation in home price growth and tipping housing market balance away from sellers,” Hale said. “But with mortgage rates continuing to climb as the Fed navigates the economy to a “soft-ish” landing, a moderation in home price growth will not be enough for the housing market to be a buyer’s bonanza. Home shoppers will enjoy advantages such as a growing number of homes for sale, but costs will remain high, challenging affordability at a time when overall budgets continue to be squeezed by inflation.”
After starting the year at 3.2%, the 30-year fixed mortgage rate rose higher than 7% in October for the first time in more than two decades. Experts differed on how much they expect the rate to fall in 2023. Lawrence Yun, chief economist for the National Association of Realtors, expects the rate to settle at 5.7% as the Federal Reserve slows the pace of rate hikes to control inflation.
Matthew Gardner, chief economist for Windermere, predicts rates will stay above 6% percent until the fall of 2023 and then “dip into the high 5% range.” Sturtevant predicted the rate would fall to 6% by the end of 2023; much higher than in recent years but similar to the rate before the Great Recession. “Rising mortgage rates have been the main cause of the pullback in sales, the average rate for a 30-year fixed-rate mortgage will end 2022 around 6.5% after surpassing 7% earlier this fall. Mortgage rates will fall in 2023, but they will not come down as quickly as they rose. Mortgage rates may have ended their steady upward rise but expect volatility in rates throughout the rest of the winter before they begin to ease.”
Marr anticipates that the rate will end 2023 at around 5.8%, averaging about 6.1% for the year. That will make buying a home slightly more affordable but much less affordable than last year. “Mortgage rates dipping from around 6.5% to 5.8% would save a homebuyer purchasing a $400,000 home about $150 on their monthly mortgage payment.”
“A homebuyer on a $2,500 monthly budget can afford a $383,750 home with a 6.5% rate; or a $406,250 home with a 5.8% rate. Mortgage payments for a typical U.S. home rose from needing 27% of median household income in January to 37% in October – far beyond the 30% threshold where housing becomes a financial burden.”