Read on for a breakdown of home prices, inventory, home sales, and interest rates in 2023.
While we all want interest rates to come down and come down soon, the best case scenario heading into 2023 is we see moderation in mortgage rates into Q1 and Q2 of 2023, staying where they are now, or coming down slightly. Inflation numbers appear to show a slowdown is occurring and unless something dramatically shifts on that front, it’s not unrealistic to say we’re at or nearing the worst of it interest rate wise.
Home Prices
The latest data from the National Association of Realtors (NAR) expects the national median home price will increase by 1%, buoyed by the current housing shortage.
As for the predictions the market will crash next year similar to what happened in 2008, the data overwhelmingly shows that will not be the case. The financial profile of consumers is much healthier now than it was 15 years ago, where we saw a rash of forced credit selling. Leading up to 2008, the market was driven by irresponsible lending regulations, subprime mortgages and overleveraged homeowners. This led then-President Obama to sign the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, which protects consumers from deceptive and predatory financial practices by ensuring banks, mortgage,student loan lenders, and credit card companies play by the rules. The Dodd-Frank Act has been very effective, ensuring home price appreciation this time around has been driven by sound lending practices and by the deficiency of supply relative to demand.
Summary: While prospective home buyers are opting to hold out for better conditions in the face of high interest rates and high home prices, the continued YoY expected appreciation of homes shows waiting will only cost consumers in the long run. Prospective buyers should look for lending programs which have adjustable rates, or programs which allow them to refinance at a low cost in the future when rates do go down, so that they can take advantage of less competition and start building equity sooner.
Inventory
Looking at the month over month comparisons, inventory is up as of November 2022 from earlier in the year, with supply sitting at 3.3 months of unsold homes. Months supply is the universal metric used to determine how long it would take for all the homes on the market to sell given the pace of current sales. Six months of supply is the benchmark for a healthy and functioning market, which means supply remains significantly below what we need for a balanced market.
The good news as we turn the calendar to 2023 is that we typically see a seasonal surge of new listings hitting the market in anticipation for the Spring selling season–and we expect that to be the case again this year.
Summary: Total inventory number has been steadily climbing back from the record lows we saw at the height of the pandemic. If you are a buyer who can temporarily make the financials work in the face of high interest rates, Q1 and Q2 of 2023 could present a window of opportunity as inventory continues to move in the right direction.
Home Sales
Unlike home prices which are expected to increase or stay flat in 2023, data from the National Association of Realtors (NAR) indicates we can expect to see a decline in home sales of around 7% next year. Turning specifically to existing home sales–all non-new-construction home sales, such as single-family homes and condos, show declining numbers for the ninth consecutive month. With interest rates expected to stay at current levels in the short term, the expectation is that existing home sales will continue on a downward trend at least into Q1 and Q2 of 2023.
The one bright spot among the declining sales numbers in both new construction and existing homes, is that single family detached homes continue to be in demand in comparison to condos, townhomes and co-ops. The demand for single family homes spiked during the pandemic, as overnight homes became the place where you lived, worked and played. While the percentage of people working from home will decrease in comparison to 2020, 2021 and 2022, the desirability of space and the flexibility to use one’s homes for a multitude of purposes will remain into 2023.
Summary: Sales will continue to decline as long as interest rates stay in the six percent and mid-five percent range. The good news for sellers is that the pace of new construction has declined along with overall buyer demand, so anyone looking to sell their home in 2023 will have less competition from new builds. The projected slight increase in home values is also a positive for prospective sellers, because it allows them to sell on their timeline rather than having the market dictate the terms.
Interest Rates
Consumers and prospective buyers are still reeling from the fastest and largest rate increases since the Fed started using rates to conduct monetary policy in the 1980s. In a matter of months, home buyers saw their purchasing power significantly cut, sellers saw a meaningful percentage of buyers disappear, and both sides were left scrambling to make sense of this new reality–which is a lot for industry professionals to take in, let alone the average consumer.
Fast forward, it’s been nine months since the Fed raised its federal funds benchmark rate by 25 basis points, to the range of 0.25% to 0.50%. The current federal funds rate as of the end of November is 3.75% to 4%, which has mortgage interest rates fluctuating between the high 5% to mid to high 6% range. The Fed’s unwavering commitment to return inflation to 2% has taken a heavy toll on the housing industry, cooling demand virtually overnight and leaving everyone guessing as to when rates will go back down.
Before we dive into predictions, let’s examine one of the unintended consequences of the Fed hiking rates: the phenomenon of interest rate lockdown. Currently, two thirds of current homeowners have a fixed interest rate below 4%. Home sellers are almost always home buyers, whether upsizing or downsizing, in most cases a seller needs a new place to live. However, with the current disparity in interest rates, we’re seeing a situation where new inventory simply isn’t coming onto the market at a rate prospective buyers had hoped, and this means that the Fed is indirectly keeping home pricing high by contributing to a lack of inventory.
Now for the good stuff–when we can expect to see interest rates go down? The truthful answer is no one really knows, but there are some helpful indicators to look at. The first is the Consumer Price Index (CPI) which shows the rate of inflation. October’s CPI numbers show inflation rising less than the Fed and the markets had anticipated. This could indicate that mortgage rates could be nearing the top as we head into 2023. The other indicator is 10-year yield. Because mortgages are backed by various bonds and securities, the low cost of a 10-year bond is translated into savings on a mortgage. Low yields on Treasury bonds equal low mortgage interest rates, and as of early December 2022 the yield has started to drop which means rates could follow.