The 2020s have mistreated home buyers. 2023 could mark a turning point in which the housing market gives them a fairer shake. Here are real estate trends to watch for in the coming year.
Reasons for optimism
The outlook for home buyers is brighter than it has been since the beginning of the pandemic.
“There will be some things for buyers to look forward to in 2023,” Danielle Hale, chief economist for Realtor.com, wrote in her housing forecast. “There will be more homes for sale, homes will likely take longer to sell, and buyers will not face the extreme competition that was commonplace over the past few years.”
Matthew Speakman, senior economist for Zillow, noted that competition has lessened and negotiating power is flowing from sellers to buyers. “This means that in many cases, buyers don’t have to settle for the first house they can win a bid on, and inspection and finance contingencies are back on the table,” he said via email.
Lisa Sturtevant, chief economist for Bright MLS, a multiple listing service in mid-Atlantic states, cautions that even if buyers have more negotiating power than they had in 2021, “it is still very much a seller’s market.” It’s vital, she says, for buyers to secure mortgage preapprovals before making offers.
Buyers may find it worthwhile to seek deals on newly constructed homes because builders are likely to reduce prices or offer incentives such as rate buydowns. Here’s why: Builders faced growing numbers of cancellations in 2022 as mortgage rates rose dramatically while houses were under construction. Buyers signed purchase contracts when rates were low, but rates had risen past the point of affordability by the time the homes were completed.
Mortgage rates could flatten or even fall
This year, the Federal Reserve hoisted the federal funds rate 4.25 percentage points to restrain inflation. Mortgage rates rose by a lesser amount: The 30-year mortgage averaged 3.21% in the first week of January, peaked above 7% in October and November and fell to 6.34% in the second week of December.
These high mortgage rates pushed many would-be buyers to the sidelines, and home sales plunged because fewer people could afford to buy. Some forecasters believe lower rates might resuscitate those homebuying dreams in 2023.
Fannie Mae, Freddie Mac and the National Association of Realtors all forecast a gradual decline in mortgage rates in 2023, with the 30-year mortgage averaging between 6.1% and 6.5% in the fourth quarter.
The Mortgage Bankers Association forecasts a more abrupt decline, with the 30-year mortgage averaging 5.2% in the fourth quarter of 2023.
Regard these predictions skeptically. These forecasters were way off the mark a year ago, when they predicted that the 30-year mortgage would average from 5% to 5.3% in the fourth quarter of 2022. They didn’t foresee how aggressively the Fed would raise interest rates and the accompanying rise in mortgage rates.
No clear trend yet on prices
Home prices, unlike mortgage rates, vary substantially from place to place and season to season, making it tricky to forecast them. For simplicity, we’ll look at national forecasts that predict what will happen to home prices from the end of 2022 to the end of 2023. The forecasts vary to a perplexing degree.
On one end of the spectrum, Realtor.com predicts that the median home price will rise 5.4%. The National Association of Realtors forecasts a price increase of 2.5%.
Sturtevant, of Bright MLS, predicts that prices will rise 0.3%. She thinks we could see an upswing in demand from “folks who have taken a wait-and-see approach at the end of 2022 coming back into the market next year” as interest rates stabilize. These buyers would compete for a limited supply of homes for sale, placing a floor under prices.
On the other end of the spectrum, John Burns Real Estate Consulting predicts that home prices will fall 20% to 22% from their peak in spring 2022, and Zonda, a real estate consulting firm, forecasts a 15% drop from the peak. These companies don’t expect the entirety of the declines to happen in 2023; prices may fall through 2024.
Rick Palacios Jr., director of research for John Burns, noted in a podcast interview that the median existing home price rose about 40% from spring 2020 to spring 2022. The way he sees it, a drop of 20% wouldn’t be surprising after such a swift run-up in prices.
“We squeezed a decade of home price appreciation into two years,” Palacios said on the Altos Research “Top of Mind” podcast.
‘Rate lock-in’ will depress inventory
About 75% of outstanding mortgages have rates under 4%, Sturtevant says. It would “take a lot of enticement” for these owners to sell their homes and trade their low-rate mortgages for home loans with rates of 6% or higher. In real estate lingo, this phenomenon is called “rate lock-in,” and it has at least two notable effects.
First, it contributes to “a marked decline in existing houses entering the market as for-sale inventory,” Zillow’s Speakman said. When people keep their homes off the market, they reduce the supply of homes for sale. If demand stays the same, home prices will resist falling.
Second, homeowners might be tempted to become landlords, wrote Taylor Marr, deputy chief economist for Redfin, in the real estate brokerage’s 2023 forecast. “Many homeowners will rent out their homes rather than sell because they don’t want to lose a low rate. There will be an influx of single-family homes for rent,” he predicted.
What will make sellers successful
Most prospective sellers will have to confront rate lock-in and resign themselves to trading a low-rate mortgage for a higher-rate loan. That’s not the only psychological hurdle that successful sellers will leap over.
“Sellers in this environment will likely have to readjust their expectations and meet buyers where they’re at if they want to make a quick sale,” Speakman said. “The days where sellers could ask nearly any price and sell in days, if not hours, are behind us. The record-breaking levels of appreciation we’ve seen over the last three years means there is plenty of room to cut prices and still realize major gains on their property.”
Sturtevant says it’s important to price a home “appropriately — to this market, not to last year’s market.” Buyers will make offers based on recent sales, which are likely to be lower than prices in spring or summer 2022.
Sellers already have been accepting contingencies for appraisals, financing and inspections, Realtor.com’s Hale wrote in her forecast, and they’ve been more willing to pay buyer closing costs and compromise on the timing of closings.
And buyers are insisting that sellers vacate their homes in good condition. “Of note, recent sellers more often reported making repairs before listing and were also more likely to make or pay for repairs during the contract period,” Hale wrote. “In short, buyer budgets are stretched to the max and sellers who understand this and help buyers get a move-in-ready home will have an edge.”
Finally, Jerimiah Taylor, vice president of real estate and mortgage services for real estate marketplace OJO Labs, recommends buying when one is ready to buy instead of waiting for prices to fall to their lowest level of the cycle.
“Ultimately, the biggest mistake that I see potential home buyers make is waiting and trying to time the market,” he says. The home’s value will almost certainly be higher in seven or 10 years, obscuring hills and valleys in price along the way, he says.
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Holden Lewis writes for NerdWallet. Email: email@example.com. Twitter: @HoldenL.
The article For Home Buyers, 2022 Was Brutal. Why ‘23 Could Be a Bit Better. originally appeared on NerdWallet.