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Status of Real Estate headed into 2023

Status of Real Estate headed into 2023


Jason Lewris from Parcl states, “In the absence of trustworthy up to date information, real estate decisions are increasingly being driven by fear, uncertainty and doubt.”


Real estate decisions can be hugely consequential for consumers and for businesses. If you don’t know the truth about the market you can make an irrational decision. If you read a headline or somebody tells you something that isn’t true it can cause you to be fearful, uncertain, or doubt whether you should or shouldn’t buy a home. This fear can cause you to make a catastrophic mistake. Irrational decisions can end up costing thousands of dollars over the long term.


As an expert realtor, my job is to educate you with the facts of the market, and help you feel confident about your real estate decision, one way or another. This month’s blog post is about the current state of the economy, and what we can expect for 2023. So lets dive in and see what the data tells us, and what history suggests may happen in 2023.


Mortgage Rates


2022 was a unique year as it pertains to mortgage rates. Mortgage rates have more than doubled in last 12 months. That has never happened before in a calendar year. The pain that people are feeling is not necessarily because rates have gone up from historically low levels, but because rates are rising so fast. This is causing people to pause their plan, and ask the question, “Do I really want to buy right now?” The result is a cool down in the market. The big question people are asking is, will mortgage rates keep rising?



At the end of the day the rapid increase in mortgage rates is all about inflation.


The Federal Reserve is making moves to raise the federal funds rate. They’re trying to lower inflation and slow down the economy. The FED doesn’t control the mortgage rates, but mortgage rates tend to follow the Fed. And that’s exactly what’s happening. It’s what we’ve been saying for the bulk of the year now that while inflation is high, mortgage rates are going to remain high. The good news is we’re not expected to see this exponential increase as we continue to go forward. We are not talking about mortgage rates doubling again next year.


This leads to the question of whether or not a recession is around the corner. In a recent survey the Wall Street Journal reports 63% of economists feel that there’s going to be a recession sometime over the next 12 months.


If a recession does arrive sometime in 2023, what does that mean for the housing market? It’s important for consumers to be educated and avoid falling prey to knee jerk reactions and fear. There is a lot we can learn from history. Keep in mind that a recession does not mean falling prices. In four out of the last six recessions in this country, home prices actually increased.


Now, we all remember the housing crash in 2008, and I think that’s fresh on everyone’s minds and people are fearful of that. But we have to remember we have a very different landscape right now when it comes to inventory, when it comes to lending standards, and when it comes to home equity. These factors are driving the housing market in a different direction here in 2022 than we had in 2008. We are in a much better situation now than we were back then.



If a recession is in play, we have to put this in context. History tells us that a recession more likely means falling mortgage rates. In the last six recessions, mortgage rates have also dropped each time. When the word “recession” is heard, there is frequently a lot of emotional reactions, but history also shows us that if the economy does go into a recession, mortgage rates will decrease, helping to stabilize home prices. We are keeping our eye on rates, because there is a lot of fear and uncertainty in the market right now.


Home Prices


So what does all of this mean for home prices? Let’s take a look at what Redfin says, “For those bearish folks eagerly awaiting the home price crash, you’ll have to keep waiting. As much as demand is pulling back, supply is as well. And that’s reducing downward pressure on prices in the short run.”


What does this mean? This means houses are staying on the market longer. We’re not seeing an influx of new listings. There is still more demand than there is supply, which makes it a seller’s market.


Some experts are projecting a little bit of appreciation in 2023. But other experts are projecting slight depreciation. So across the board it’s; a little bit up, a little bit down, depending on how experts are looking at it. We feel those overheated markets where prices went up so rapidly during the pandemic may see a downward in prices this year, while other markets are that didn’t see a rapid rise, will hold steady. When we average these out across the year, we predict roughly flat home price appreciation for 2023. And when 2024 arrives we expect to return to more normal levels of home price appreciation.


Foreclosures


If you look at foreclosure data going back to 2005, the data shows something very interesting. Ever since 2010 the number of foreclosures have decreased in the United States, and there is a reason for that. Leading up to the financial crisis of 2008, lending standards had been loosened, with the goal of increasing home ownership. This caused more people to buy houses that were not really qualified to get a loan. Over time more and more people couldn’t pay their loan and defaulted on their mortgage, which ultimately led to the financial crash of 2008. Coming out of the financial crisis of 2008, lending standards became a lot stricter, which resulted in a better qualified borrower. Aside from the covid years, every year since 2010 we have seen less and less foreclosures in the United States.



Conclusion


Inflation hit 2022 hard and mortgage rates rose rapidly as a result. The good news is, we don’t expect that to continue in 2023, at least not at the same pace it did this past year. Most economists expect 2023 will see some sort of recession. But just because we experience a recession, does not mean that home prices will decrease. As we stated above, in four of the last six recessions home prices actually increased. We can learn a lot from history, and we are in a very different situation today than we were in 2008. Today, home supply is very low, compared to 2008 when home supply was at an all-time high. That supply is keeping prices stable, and we expect that to continue in 2023.


If you are interested in making a move but are feeling fearful of the economy and all the news you have been hearing lately, rest assured that things may not be as bad as they appear. If you have any questions about real estate, please feel free to give me call, and we can talk through your specific situation.


Sources:


https://blog.firstam.com/economics/will-foreclosures-rise-as-the-housing-and-labor-markets-cool

https://www.fanniemae.com/media/45306/display

https://www.freddiemac.com/research/forecast/20221021-quarterly-forecast-rapidly-rising-rates-declining-demand-driving-housing-market

https://www.bankrate.com/real-estate/housing-market-predictions-2023/#home-values

https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales

https://www.freddiemac.com/research/forecast/20221021-quarterly-forecast-rapidly-rising-rates-declining-demand-driving-housing-market

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