Last year was a wild ride in the US housing market. Mortgage rates doubled and sales plummeted, triggering the longest month-to-month slump on record. A lot of would-be buyers and sellers watched from the sidelines.
Throughout 2022, the Federal Reserve hiked its benchmark interest rate at a record pace to slow the economy and fight high inflation. Housing took the brunt of the impact, as the most interest rate-sensitive sector of the economy. The Fed’s actions had the intended effect, though, with housing affordability deteriorating and demand dwindling, which led to declining sales and slower annual price growth.
So what’s in store for the housing market this year? Home prices rose nearly 40% from the spring of 2020 to the spring of 2022, representing roughly a decade of price gains in just a couple of years. Will what went up also come down?
Housing experts and economists are not in agreement.
Economists’ predictions range from prices rising by around 5% this year, according to Realtor.com, to as much as a 22% decline from the peak in 2022 to the trough, according to John Burns Real Estate Consulting.
What happens with inventory, mortgage rates, and the broader economy will likely determine which tack the market takes.
“Mortgage rates are really critical to the path of the housing market in the year ahead,” said Jeff Tucker, senior economist at Zillow. “We are watching to see affordability gradually improve. That should breathe some life back into the market.”
Another thing he’s keeping an eye on is inventory of homes for sale, which is already almost back up to where it was in 2020, he said.
“Yes, things have cooled way down in the housing market, but we don’t have a glut of homes for sale,” said Tucker. “That is the main thing that is buffering us from runaway price declines.”
Zillow forecasts that home prices nationally will decline by between 1% and 4% from last June’s levels, the 2022 peak.
“Seeing prices that are staying flat to 1% or 4% down puts us on the more bullish side for price changes of forecasters out there,” said Tucker.
But he said the tight inventory picture and strong unmet demand to buy a home suggests to him that, should mortgage rates drop a bit, there will be more movement in the market.
He said more inventory would then become available from the locked-in homeowners clinging to their ultra-low mortgage rates from the past couple of years.
“Owners for whom lower mortgage rates give them permission to sell and move, they will then be buyers,” Tucker said.
The National Association of Realtors projects prices will go up less than 1%, reaching a median price of $385,800 by the end of 2023. But NAR warned that even this small shift masks a lot of regional variability.
“Half of the country may experience small price gains, while the other half may see slight price declines,” said Lawrence Yun, NAR chief economist. “However, markets in California may be the exception, with San Francisco, for example, likely to register price drops of 10%-15%.”
Areas that saw the biggest run-up in prices will also see some of the largest drops, Yun added.
As a result, the search for affordability is leading many would-be homebuyers toward lower-priced metro areas where the cost of a house can fit within more families’ budgets, said George Ratiu, manager of economic research at Realtor.com.
“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive locations are lured by solid local economies and median prices, which in some cases are still below $300,000,” Ratiu said.
The days of 3% or 4% mortgage rates are gone for the foreseeable future, but rates will likely settle in below the pre-pandemic historical rate of 8%, according to housing economists’ consensus.
But first, inflation needs to cool off. The inflation data at the end of 2022 was promising — but there is still a ways to go.
“Inflation expectations themselves play into mortgage rates and it impacts the monetary policy,” said Tucker. “The Fed wants to wait and see inflation coming down before they take their foot off the brake on raising rates. Growing consensus is to expect another step down in the pace of tightening.”
While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them.
Mortgage rates tend to track the yield on 10-year US Treasury bonds. When that rate goes up, the 30-year fixed-rate mortgage typically goes up, too. When the Treasury rate goes down, so do mortgage rates.
In November, as mortgage rates started a six-week tumble, the median monthly mortgage payment fell by 1.8% to $1,977 from $2,012 in October, according to the Mortgage Bankers Association.
While mortgage rates are on the rise again, this improvement in affordability may play out again in 2023 when and if rates nudge down.
Forecasters, again, predict a wide range of where rates will go in 2023. While Realtor.com anticipates rates for the 30-year, fixed-rate loan will be above 7% in 2023, Zillow projects rates closer to 6% this year, ending the year at between 5.5% and 6%.
After the 30-year fixed mortgage rate eclipsed 7% in late 2022, Yun said he expects that to settle at 5.7%, as the Fed slows the pace of rate hikes in response to slowing inflation.
In 2023, we may see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong back half of the year for buyers, said Leonard Steinberg, corporate broker at Compass in New York.
“The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, especially given the competing demands from first-time buyers looking to get into the market and retirees looking to move or downsize,” Steinberg said.
Chronic under-building of new homes is also likely to remain a challenge across all market segments as builders grapple with the challenge of balancing a short-term decline in demand with the long-term need for more new housing, he added.
“People everywhere need to buy and sell homes every day, and these buyers and sellers will show up to compete throughout 2023 and beyond, as the market continues to re-balance and normalize,” Steinberg said.
There is likely to be a return to the traditional seasonality of the real estate market, in which inventory tends to rise in February and carry through the summer. Meanwhile, prices often peak in May or June and prices and sales tend to slowly decline until the end of the year.
“The spring market will be busier and more competitive, for buyers, while the next two months will be the calm before a more hectic time,” said Tucker.
Buyers are likely to pay more during the spring selling season, when homes tend to sell for a seasonal premium because that’s when most buyers are trying to get it done.
Would-be buyers who are pulling for prices to come way back down may be left holding their breath in 2023.
“The big surprise for a lot of people might be that the market has a really boring year,” said Tucker. “It would be a great change of pace. A plain, boring, vanilla year in the housing market would be a wonderful surprise.”