Market to Regain Normalcy

Some housing markets may see an uptick in homebuying activity at the beginning of the year, especially if mortgage rates continue receding from a recent high of 7%. Housing inventory is expected to remain tight in 2023, with housing starts below historical averages and fewer homeowners willing to sell, said NAR Chief Economist Lawrence Yun. The ongoing housing supply challenges will prevent home prices from falling, though price appreciation will slow, he added. “I see many hopeful signs for early next year,” Yun said.

But first, the market has to close out 2022, a year when inflation soared to a 40-year high and rapidly rising mortgage rates put the brakes on what had been a pandemic-era homebuying frenzy. Existing-home sales are expected to end the year 16% down from the same time period in 2021, marking their lowest level since 2014, Yun said. Annual new-home sales likely will be down 17% for 2022, returning to pre-pandemic levels.

Yun predicts home sales to fall by 6.8% in 2023 compared to 2022, with the brunt of the slowdown to occur in the first quarter of the new year. Some of the softening can be attributed to homeowners who are unwilling to trade in a higher mortgage rate, as well as economic uncertainty. Meanwhile, home prices in 2023 are forecast to reach $385,800, an increase of 0.3% compared to 2022.

“After a big boom over the past two years, there will essentially be no change nationally” in home prices in 2023, Yun said. “Half of the country may experience small price gains, while the other half may see slight price declines.” He pointed to markets in California, like San Francisco, that may be the exception. The Bay Area could register double-digit price drops of 10% to 15% next year, Yun added.

“Mortgage rates are the lifeblood that drive home sales,” Yun said. For the last four weeks, rates have been dropping after reaching 7.08% in November. On Tuesday, the Consumer Price Index offered hope that inflation is further cooling, prompting the Federal Reserve to start slowing the hikes to its benchmark interest rate.

Yun said he believes mortgage rates may have already peaked. He points to an “abnormally high spread” between 30-year fixed-rate mortgages and the Treasury, which historically are more closely tied together. “As the mortgage market normalizes, it will be an opportunity for rates to decline even further,” Yun said, adding that he expects mortgage rates to settle at 5.7% by the end of next year.

Still, mortgage rates are more than double what they were a year ago, ramping up rapidly this fall and walloping housing affordability. But if inflation continues to slow and rates stabilize, that could bring more buyers back to the market and boost demand for housing, Yun said.

Other leading housing economists also gave their take during NAR’s Real Estate Forecast Summit about what’s in store for the real estate market in 2023.

Realtor.com: Bullish on Home Prices

Realtor.com® Chief Economist Danielle Hale was upbeat about the prospects of property appreciation, projecting a 5.4% increase in existing-home prices for 2023. “We think price growth will be half of what it was in 2022, and we may see some months of year-over-year declines,” Hale said. “But overall, we believe prices will be higher. [Housing] shortage conditions are still going to be present in the market.”

She said she expects home shoppers to continue to grapple with housing affordability in the new year. Realtor.com® predicts mortgage rates to average 7.1% by the end of 2023—considerably higher than NAR’s prediction of 5.7%. Home buyers still will face sticker shock, Hale said, “but they will have more time to make a decision and more options.”

NAHB: Sharp Contraction in Construction

Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at the National Association of Home Builders, said she expects housing starts to drop by double digits in 2023. Then, “as the economy improves in 2024, the housing market will gradually come out of this slump that is expected from the next year,” she added. 

Builder confidence has fallen over the last 11 months as mortgage rates rose and buyer traffic slowed dramatically. Fifty-nine percent of builders have reported using incentives, like mortgage rate buydowns and price cuts, to try to win buyers back, Nanayakkara-Skillington said.

Labor shortages combined with lot shortages, higher material costs and lending issues for builders are all compounding factors preventing more construction. And while lumber prices have eased from record highs, construction costs remain 14% higher due to shortages in other supplies, like gypsum and steel. “All of these issues will keep homebuilding down,” Nanayakkara-Skillington said. “We don’t see these issues being resolved in the near future either.”

Bright MLS: The Great Reset

“We believe 2023 will bring lots of variability in how housing markets adjust,” Bright MLS Chief Economist Lisa Sturtevant said. “There will be a lot of resetting expectations for both buyers and sellers.”

Sturtevant predicted variations from market to market, with the greatest risk for price declines likely to occur in pandemic-era boomtowns—communities that saw some of the largest increases over the last two years. “In places where buyers bid up prices, they will have to reset—and in some places, they could see prices fall significantly from their peak,” she said. “Regardless, in almost every market, we believe prices will still remain above 2019 levels. So even if prices do come down, we should still be ahead of where we were prior to the pandemic.”

Sturtevant added that many consumers could take a wait-and-see approach as they digest higher mortgage rates and come to terms with the changing market. Bright MLS data shows 40% of sellers have adjusted their home price downward or offered concessions. “This period of acceptance will take some time,” she said. “Sellers have to process all of this, and that is underway now. It’ll take a little time—probably into the first quarter of next year—to fully digest it.”

CoreLogic: ‘A Crisis of Consumer Confidence’

“There is a different sentiment happening: I call it a crisis of consumer confidence,” said Selma Hepp, CoreLogic’s interim chief economist. “Sellers are contending with not wanting to reduce their prices. Buyers are seeing the headlines saying that prices will come down but are also finding their purchasing power has been diminished by higher mortgage rates. They’re wondering: ‘Should I even enter the market? I may end up with negative equity.’”

Annual home price growth is expected to slow to 8% by December—and then 0% by the spring of 2023, according to CoreLogic data. “We believe this will vary greatly across the country, and the rate of growth and decline will depend on the region,” Hepp said. For example, markets like San Francisco, Seattle, Las Vegas and Phoenix, all of which saw surging home prices during the pandemic, could experience the most pronounced price declines of up to 12%, she added. “Housing markets will continue to struggle with the loss of consumer confidence.”

 

Source NAR Realtor Magazine