If “hot” was the overused word to describe the U.S. housing market in 2021, then “lukewarm” to “freezing” might be a better description of how the market performed this year.
The pandemic housing market boom, which saw home prices rise by 40% in two years, began to slow down in the second half of the year as mortgage rates doubled from the start of the year.
Rising mortgage rates contributed to the growing mismatch in expectations between buyers and sellers as the Federal Reserve attempted to tamp down decades-high inflation with rate hikes throughout the year. Homes sat on the market for months as sellers continued to price them at prices that buyers couldn’t afford. Contracts were terminated, asking prices were reduced, and inventory levels were reduced.
Mortgage rates have been steadily falling in the last four weeks after crossing 7% in October, which may provide some relief to buyers but may not be enough to offset still-high asking prices.
So, what will the housing market look like in 2023? We asked six experts for their forecasts.
Mortgage rates and the Federal Reserve
The Federal Reserve raised its key short-term interest rate by half a percentage point on Wednesday, a smaller increase than the previous four, as inflation eased.
In addition, the Fed predicted that the economy would face slower growth, higher unemployment, and higher inflation in 2023.
According to Mike Fratantoni, chief economist for the Mortgage Bankers Association, weaker growth typically leads to lower long-term interest rates, including mortgage rates.
“The recent drop in mortgage rates has certainly been welcomed by the housing market,” he said. “This decline reflects market expectations that short-term interest rates are nearing their peak, as well as growing evidence that the United States will enter a recession next year.”
Mortgage Financing Innovations
According to Janneke Ratcliffe, vice president of the Urban Institute’s Housing Finance Policy Center, housing finance has reached a tipping point.
She anticipates an increase in innovation, with lenders, startups, advocates, researchers, and policymakers actively pushing the boundaries of what is possible in mortgage finance.
“We’re seeing pilots and new programmes in credit scoring, artificial intelligence, climate adaptation, manufactured housing, and other areas,” she says. “Not only does the industry recognise the issues of inequality, but many players are actively expressing their commitments to closing the racial homeownership gap.”
Ratcliffe also anticipates that the use of adjustable-rate mortgages will increase, with 12% of total applications in November, up from 3.3% in November 2021.
“Would-be homebuyers should not be afraid of this financial tool,” she says. “Their use has always been common, and regulatory reforms implemented following the Great Recession have significantly reduced their risk.”
There is no ‘foreclosure tsunami.’
According to Odeta Kushi, deputy chief economist for First American Financial Corporation, foreclosure is the result of two simultaneous triggers: a lack of ability to pay, which results in delinquency, and a lack of equity in a home.
A homeowner with enough equity has the option of selling the home or using that equity to weather a temporary financial setback. The inverse, a lack of equity in the home in the absence of a financial setback that leads to delinquency, will not result in a foreclosure.
Homeowners today have very high levels of tappable home equity, which provides a cushion to withstand potential price declines while also preventing housing distress from becoming a foreclosure, according to Kushi.
“In fact, given their equity buffers, involuntary sales are much more likely than foreclosures if distressed homeowners are required to resolve delinquency,” she says. “While we can expect the number of foreclosures to rise as the labour market slows and house prices fall from their peak, the result will most likely be a trickle of foreclosures.”
Housing inventory will remain limited.
According to real estate appraiser Jonathan Miller, who prepares the monthly Douglas Elliman Real Estate report for New York City, the chronic lack of listing inventory has been the key driver of price gains during the pandemic-era housing boom, and it will be the key underpinning of prices in 2023.
“In previous housing downturns, listing inventory was piled to the sky,” Miller says. “Consumers are wedded to the low rates they refinanced into or purchased homes at during the boom; excess supply is not the story for 2023 because price declines should be kept to a minimum even with modest listing inventory growth.”
