Cut through the online clutter and armchair quarterbacking of the real estate industry with these ten predictions from Windermere Real Estate Chief Economist Matthew Gardner. This article appeared in Inman, Hickman-Coen Home Team is a subscriber.
- There is no housing bubble. Mortgage rates rose steeply in 2022, which, when coupled with the massive run-up in home prices, has some suggesting that we are recreating the housing bubble of 2007. But that could not be further from the truth. Over the past couple of years, home prices got ahead of themselves due to a perfect storm of massive pandemic-induced demand and historically low mortgage rates. So while I expect year-over-year price declines in 2023, I don’t believe there will be a systemic drop in home values. Furthermore, as financing costs start to pull back in 2023, that will allow prices to resume their long-term average pace of growth.
- Mortgage rates will drop. Mortgage rates started to skyrocket at the start of 2022 as the Federal Reserve announced its intent to address inflation. While the Fed doesn’t control mortgage rates, it can influence them, which we saw with the 30-year rate rising from 3.2 percent in early 2022 to over 7 percent by October. Its efforts have yet to reduce inflation significantly, but they have increased the likelihood of a recession in 2023. Therefore, in early 2023, the Fed should start pulling back from its aggressive policy stance, and this will allow rates to begin slowly stabilizing. Rates will remain above 6 percent until fall 2023 when they should dip into the high 5 percent range. While this is higher than we have become used to, it’s still more than 2 percent lower than the historical average.
- Expect inventory to grow slowly. Although inventory levels rose in 2022, they are still well below their long-term average. As a result, in 2023, I expect the number of homes for sale to remain the same, as many homeowners want to maintain their low mortgage rates. Twenty-five to 30 million homeowners has mortgage rates around 3 percent or lower. Of course, homes will be listed for sale for career changes, death, and divorce, but the 2023 market will not have the average turnover in housing we have seen in recent years.
- No buyer’s market but a more balanced one. With supply levels expected to remain well below average, it’s unlikely we will see a buyer’s market in 2023. A buyer’s market is usually defined as having more than six months of available inventory, and the last time we reached that level was in 2012 when we were recovering from the housing bubble. To get to six months of inventory, we would have to reach 2 million listings, which has not happened since 2015. In addition, monthly sales would have to drop to below 325,000, a number we last saw over a decade ago. So although a buyer’s market in 2023 is unlikely, I expect a far more balanced return.
- Sellers will have to become more realistic. We all know that home sellers have had the upper hand for several years, but those days are behind us, and though the market has slowed, there are still buyers out there. The difference is that higher mortgage rates and lower affordability limit how much buyers can pay for a home.
- Workers return to work (sort of). The pandemic’s impact on where many people could work was profound, allowing buyers to look further away from their workplaces and into more affordable markets. Many businesses are still determining their long-term, work-from-home policies, but in the coming year, there will be more clarity for workers. Remote work could be the catalyst for those waiting to buy until they know how often they’re expected to work at the office.
- New construction activity is unlikely to increase. Permits for new home construction are down by over 17 percent year over year, as are new home starts. I predict builders will pull back further in 2023, with new starts coming in at a level we haven’t seen since before the pandemic.
- Not all markets are created equal. Markets, where home price growth rose the fastest in recent years are expected to experience an extreme swing to the downside. For example, in areas with an influx of remote workers, who flocked to cheaper housing during the pandemic, real estate market needs will likely see prices fall by a more significant percentage than in other parts of the country. That said, even those markets will start to see prices stabilize by the end of 2023 and resume a more reasonable pace of price growth.
- Affordability will continue to be a significant issue. Home prices in most markets will stay the same in 2023, but more than a price drop is needed to make housing more affordable. And with mortgage rates remaining higher than they’ve been in over a decade, affordability will continue to be a problem in the coming year, which is a concerning outlook for first-time buyers. Over the past two years, many renters have had aspirations of buying, but the timing could have been better for them. Unfortunately, with prices and mortgage rates spiraling upward, many renters are now in a situation where the dream of homeownership has gone. That’s not to say they will never be able to buy a home, just that they may have to wait a lot longer than they had hoped.
- The government will start to take housing more seriously. Over the past two years, the market has risen to such an extent that it has priced out millions of potential homebuyers. With a wave of demand from millennials and Gen Z, housing production must increase significantly, but many markets need more land to build on. This price increase is why I expect more cities, counties, and states to start adjusting their land use policies to free up more land for housing. But it’s more than just land supply that can help. For example, elected officials can assist housing developers by utilizing Tax Increment Financing tools, whereby the government reimburses a private developer as incremental taxes are generated from housing development. There are many tools like this at the government’s disposal to help boost the housing supply, and I sincerely hope that they start to take this critical issue more seriously.
Matthew Gardner is the chief economist for Windermere Real Estate, the nation’s second-largest regional real estate company.