This article is part of our 2022 – 2023 Housing Market Update Series. After the series ends, join us on February 6 for the Real Estate Market Update HW+ Virtual 2023. Bringing together some of the leading housing economists and researchers, the event will provide an in-depth look at the predictions for this year, along with a panel discussion on how this insight applies to your business. The event is exclusive to HW+ membersand you can go here to register.
After two years of runaway house prices, the Federal Reserve stepped in to reverse engineer rampant inflation, and has been using the real-estate market as one of the main economic engines to achieve its objective. They increased the federal funds rate from nearly 0% in early 2022 to 4.5% in December 2022, its highest level since 2007 and its fastest increase in more than 40 years.
Long-term mortgage rates it responded by increasing from 3.25% in early 2022 to over 7.25% in October 2022, more than doubling. They fell below 6.5% recently as core inflation figures improved for the third month in a row. Core inflation for the Consumer Price Index, less food and energy volatility, is currently at 5.7%, after peaking at 6.7% in September 2022. The core inflation target for the Fed is 2%, so they still have a long way to go. The overall US economy has remained resilient, supported by a very strong labor market, sky-high job openings, and low unemployment.
Mortgage interest rates
the relentless federal policies to combat inflation will eventually cause an economic downturn sometime in 2023. The next downturn is more likely to have a smaller impact on employment, more of a “soft giveaway” than a typical downturn. As a result, the local real estate market will be subdued in 2023, especially in the first half of the year.
Just as 2022 was all about rising mortgage rates and rising inflation, 2023 will be all about falling mortgage rates and falling inflation. After exceeding the core inflation target of 2% in April 2021, it rose continuously for 18 months, peaking in September 2022. It did not hit 6.7% overnight.
It was more like a slowly increasing dimmer switch. Similarly, core inflation will not fall to 2% instantly, that same dimmer switch will apply in the future. It will take all of this year and until 2024 to get back to the Fed’s target. As inflation declines, so will long-term mortgage rates. Slowly but surely rates will drop below 6% and continue their slow downward trajectory, falling below 5.5% most likely by mid-year.
Inventory
What does that mean for housing? Until mortgage rates fall below 5.5%, we can expect low home supply, which favors sellers. We can also expect low demand for homes, which favors buyers. Higher mortgage rates have severely affected demand. The crazy, fast-paced real estate market of the COVID-19 pandemic years has faded.
Housing demand is similar to Great Recession levels, but this time it is facing extremely limited supply. As mortgage rates drop, expect demand to improve, especially in the second half of 2023. Until then, home values will decline slowly, with greater certainty in high-cost areas and in areas of the country that are most they benefited from rampant appreciation during the pandemic. .
Since the 2020 COVID-19 pandemic shutdowns, inventory has fallen to record levels in both 2021 and 2022. Inventory hit catastrophic low levels due to a limited number of homes on the market coupled with insatiable demand driven by record- Low rates.
Inventory turned around last year when fees finally increased, eating away at demand. Homes no longer sold instantly, they stayed on the market, and over time the inventory grew. However, even with higher rates, inventory has stopped growing and has not reached pre-pandemic levels.
The COVID-19 pandemic wiped out inventory in 2020 and 2021. Fewer homeowners chose to sell. When COVID-19 took a backseat to normal life in 2022, it was going to be the year more homeowners were poised to enter the fray. That didn’t happen as many homeowners “hunkered down” and chose not to move.
Homeowners may not have been in love with their homes, but they certainly were in love with their loans. 86% of homeowners with a loan had an underlying mortgage rate of 5% or less. Almost two-thirds had a rate equal to or less than 4%. And a very lucky 24% had a rate equal to or less than 3%. As a result, fewer homeowners put their homes on the market compared to the 3-year average prior to the COVID-19 pandemic (2017 to 2019).
Take a look at Southern California, for example, there were 51,000 sellers missing from the market compared to the 3-year average, which is about 19% fewer homes for sale. This trend grew significantly as 2022 progressed and severely limited housing supply growth to its true potential. As mortgage rates drop this year, the “safe haven” effect will fade.
The bottom line: 2023 will be slow compared to 2022 for the first half of the year. Remember, the market was active during May, so the year-over-year statistics will seem absurd. However, the second half of 2023 promises to be better than the second half of 2022, as rates drop, demand increases, and more homeowners will be willing to sell.
The housing market is not crazy anymore, houses for the most part do not sell above their asking price, do not sell immediately, do not sell with multiple offers and there is much less activity and competition among buyers .
This column does not necessarily reflect the opinion of the HousingWire editorial department and its owners.
To contact the editor responsible for this story:
Sarah Wheeler in [email protected]
