The past couple of years have been absolutely insane when it comes to real estate. The blazing hot 2021 market carried over through the summer of 2022 then seemed to come to a screeching halt within the past month. With rising interest rates, a looming recession, outdated infrastructure, and rampant inflation, what does the 2023 real estate market look like?
Before we get started, delete all the “world is going to end” crap you have heard or read on television, social media, podcasts, etc. out of your brain. I am going to look at the major factors influencing the housing market and explain what they actually mean as a whole. It is easy to pick one headline and turn it into click bait. Watch this. “RISING RATES = WORST HOUSING CRASH IN HISTORY!!!” or “LIMITED INVENTORY = HOTTEST HOUSING MARKET EVER!!!”
As you can see, it is incredibly easy to twist the facts to fit a narrative. Let’s not do that.
We are going to skip the backstory of how we got into the market conditions and dive straight into what current market conditions mean for 2023. If you are curious as to how we got here, go check out my article I wrote back in July. It was a pretty spot on prediction for the current market if I don’t say so myself.
Rising Interest Rates
If you have been shopping for a home this year, you know that your interest rate can literally change substantially from day to day. Interest rates have risen very quickly this year leading to many disheartened potential buyers however, are they really that high? If we pull a chart that covers only the last couple of years, it would look absurd. Let’s be a little more realistic and look at the 30 year average for a 30 year fixed rate mortgage.
Doesn’t look so bad now does it? So what effect does this have on the housing market? I like to think of things in terms of supply and demand. Supply and demand is the foundation for any economic market. Rising interest rates simply decrease demand but have little to no effect on supply. The overall effect in a neutral market would be a decrease in prices and listings spending more time on the market. In a super hot market, it may simply decrease demand enough to cause homes to be on the market a little bit longer.
Hyperinflation is something that we are experiencing today because of the decision to dump gazillions of freshly printed dollar bills into the economy. I’m not here to argue politics, it is simply a fact. Here is inflation over the past 30 years.
Inflation is very interesting to analyze when it comes to its impact on the real estate market. With inflation comes not only higher purchase prices but also increased rent. In fact, it actually has a bigger impact on rent than real estate prices which should result in an even greater demand to buy. Yes it decreases purchasing power however, it is not isolated to just real estate prices. It also incentivises existing home owners to sell as they instantly get a lot more equity in their home. The issue is that it discourages new construction as the cost of materials also goes up substantially. Value goes up while mortgage payment remains the same.
In terms of supply and demand, inflation actually decreases overall supply due to decreased new construction. Some larger builders have actually chosen to move away from single family homes and into apartment complexes. The return is slower but much greater. According to the US Census people, new construction is down over 3% from last year. I anticipate that to fall even more through 2023.
Social sentiment is becoming more and more powerful as social media turns random noise into a unified voice. I have seen so many industry professionals preaching about an inevitable housing market crash in order to pressure sellers into listing properties or to gain some social clout. The sad fact of the matter is that this tactic is highly effective. The message is shared through social media channels that touch millions of individuals in a short amount of time. Studies also show that Millennials and Gen-Zs actually get the majority of their information from social media. While social sentiment shouldn’t have an impact on any market, we can see dozens of examples like bitcoin, GME, AMD, etc. where billions of dollars exchanged hands purely on the basis of social sentiment. Social sentiment is real and it is powerful.
According to great aunt Fannie Mae, housing sentiment is at its lowest levels since 2011. For the first time since May of 2020, more people than not expected home prices to decline. That absolutely baffles me.
In terms of supply and demand, sentiment is pure demand. In this case, there is a huge decrease in demand. I don’t know how many times a day I hear “I’m going to wait for the market to crash.” Ironically, I also hear this pretty often from potential buyers back in 2018-2020. Those people are now looking at paying at least 40% more on the purchase price and 3% more on the interest rate than if they would have just pulled the trigger back then.
I have to put a little blurb in here about foreclosures. According to the National Association of Realtors, foreclosures and shortsales are at an all time low. This is no surprise given the COVID-19 foreclosure moratorium. They are currently sitting at about 0.1% of the total housing supply vs the average of around 5%. This is not huge but statistically significant enough to mention in this article.
What does it all mean?
Home prices falling is wishful thinking (if you’re a buyer). From a purely logical standpoint, we have seen a 15%+ increase in home prices in most markets since last year. This means that appreciation would have to happen at a rate of at LEAST -16% to see any sort of decrease. A decrease in home prices would take something catastrophic like nuclear war or Yosemite erupting.
One major factor that could actually cause a second surge in home prices is interest rates decreasing. While I find this highly unlikely over the next year, it is possible that they fall back down a couple percent once the inflation data has time to get back to the Feds. I won’t go too deep into this topic as it would warrant another 10 pages and you would definitely fall asleep (if you haven't already). Simply put, interest rate hikes are being implemented at intervals that are so close together, the economy doesn’t have time to respond. I believe it is highly likely that the Feds have gone a little overboard on rate hikes.
We have a decrease in supply AND decrease in demand. I believe the decrease in supply to be more significant than the decrease in demand. This leads us towards a really weird market where less homes are sold but prices continue to increase. Home prices will likely increase less than 5% however, they are going up. No doubt about it.
If you are looking to purchase a home, don’t give up. Keep in mind that a shifting market also gives you more negotiating power. No more are the days of 42 offers with 41 of them being over asking price. In many markets seller concessions are back! Don’t be afraid to ask for some repairs or closing costs. Most importantly, be patient! The patient buyers are the ones who are going to win in today’s market.
To my potential sellers… Listen to your Realtor! Don’t think you can just pick a number and slap it on the house and get a dozen offers in less than a week. Those days are gone. Be prepared to negotiate with potential buyers. Many buyers, especially first time home buyers, oftentimes need a little help with closing costs. Don’t alienate those buyers. Despite all that, you can still expect to put quite a bit of cash in your pocket.
Of course, I could be completely wrong and you might have just wasted a lot of time reading all this. Just know that I truly appreciate the support! If you are currently a homeowner, feel free to reach out to me for a completely free home evaluation to see how your home would perform in today’s market. It’s okay if you have no intentions of selling. You should know how your biggest financial asset is performing.