State of the Housing Market – December Recap

As the Consumer Price Index has risen, per the U.S. Bureau of Labor Statistics, the Federal Reserve has responded to lower inflation with seven interest rate hikes, causing higher rates for mortgages, leading to elevated home pricing. The average 30-year fixed mortgage rate is the highest it has been in 20 years, topping seven percent, according to Freddie Mac. 

According to the National Association of Realtors (NAR) Housing Affordability Index, as of October, average monthly mortgage payments are up 50 percent year-over-year, from $1,275 (2021) to $1,975 (2022).

In the November Economic and Housing Market Outlook, NAR stated that the median existing-home sales price rose 8.4 percent from last year to $384,800. According to the National Association of Homebuilders, the current new home sales price is $470,000, up nearly 14 percent from a year ago. The seasonally adjusted rate for new family home starts is 892,000 units, down 18.5 percent compared to last year.

NAR found that the overall supply of homes is low, and the inventory of unsold existing homes was at a 3.2-month supply. That being said, although inventory is tight, homes are selling quickly. Normally, the typical home is available for 45 days. Currently, the median number of days for homes remaining on the market ranges from 13-23.

NAR data also found that fewer existing homes are selling nationwide, dropping from 6.49 million in January to 4.71 million in November. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, sales of new single-family houses were at 511,000 this year, 29.6 percent lower than the seasonally adjusted rate last year.

While still high by historical standards, these indicators represent a slowdown in sales due to inflation, and consumer sentiment is low. According to data collected by Fannie Mae’s Home Purchase Sentiment Index (HPSI), 75 percent of consumers feel it is not a good time to purchase a home, with nearly three-quarters of those surveyed stating that the uncertain economy, combined with high home prices and mortgage rates, are primary reasons to avoid participating in the current market.

NAR studies reveal that mortgage rates will remain at seven percent for most of 2023, generating a greater consumer interest in adjustable-rate mortgages (ARMs) throughout next year. However, 65 to 85 percent of buyers will eventually return to the standard 30-year fixed mortgage in 2023 due to its certainty for buyers and liquidity for investors.

Due to the rise in mortgage rates, monthly payments have increased considerably. Borrowing $400,000 at a three-percent rate yields a payment of $1,686. A 30-year mortgage for $400,000 at a seven-percent rate hikes the payment to $2,661, an increase of nearly $1,000 per month. Experts point out that few buyers can afford such a mortgage, potentially spelling trouble for the 2023 housing market.

That being said, there has recently been some good news with 30-year fixed mortgage rates having dropped for three consecutive weeks, reaching 6.33 percent. With bond yields also lower, this signals that the economy is weakening, which should lead to slower inflation and hopefully less future rate hikes by the Fed.

New home purchase applications have risen in response to the lower mortgage rates. According to Redfin, a rate drop from seven percent to 6.6 percent translates into about $12,000 more buying power, which can make a huge impact on a consumer’s overall budget. It remains to be seen if the mortgage rate drop will equate to more home buyers since prices are still too high for many.

Many experts are on the fence about increasing housing values. Home sales have fallen for nine consecutive months. For home prices to return to 2020 levels at current interest rates, property prices will have to decline more than 40 percent. Some argue that prices will have to fall substantially to restore balance because the supply curve is not flat, and the plunge in demand should drive prices down.

Experts compare home prices to median incomes as a basic measure of affordability. With a median house price of $360,000 and a median income of $90,000, the price-to-income ratio is four. Due to the damage caused by inflation and rising mortgage rates, the ratio has gone from four to 5.3 in the last two years. To get back to four, home prices will need to fall at least 40 percent.

Market professionals have seen home prices fall from peak values, but due to demand and supply contraction, most do not see dramatic price drops occurring. According to NAR, home prices will remain steady, with increases or decreases of about five percent on a nationwide basis in 2023. 

Due to rampant inflation and a possible recession looming in the future, many are asking if the housing market will remain stable and if now is a good time to purchase a home. Prospective buyers are sitting on the sidelines hoping that prices will correct themselves, or at least somewhat fall, before making a purchase.

Many homeowners looking to sell are making the decision to stay put, unwilling to cast aside their low-rate mortgages. Most experts expect the real estate market to favor sellers while housing inventory remains low. However, many sellers are saying there are currently fewer buyers due to economic uproars, and many sales require a price reduction that places them on the losing end of the transaction.

Real estate agents are advising clients to wait before buying, especially if they can’t afford to adjust their budgets accordingly. Rushing to buy in order to beat rising home prices and mortgage rates may not be the best course of action. 

Rather than gambling now, experts say waiting a couple of years may be a good play, especially if consumer income growth outpaces home price fluctuations. Regardless, property professionals state that there are no guarantees, and if a home is purchased, plan to remain in that investment until the property appreciates considerably in order to sell at a profit.

A new housing predictions report from Realtor.com states that the home buying and selling market will be “challenging” in 2023, with mortgage rates rising once again before dropping near the end of the year.

Realtor.com believes there will be further impact on the housing market due to the Fed hiking interest rates, which would raise home prices while slowing overall home growth. The report states that home sales will decline nationwide 14.1 percent year-over-year to 4.53 million, the lowest level since 2012.

It will be more expensive to finance and purchase a home, but on the flip side, there will be less competition since many buyers won’t be able to afford properties, possibly enhancing negotiating power for buyers.

Realtor.com says the homeownership rate in the U.S. is expected to basically hold steady, ticking down to 65.7 percent in 2023 from 65.8 percent in 2022. The average homeowner will see their equity rise by $25,650 in 2023.

According to the report, more homes will be available for sale, and those properties will remain on the market for a longer period of time, providing more choice and the ability to make better buying decisions. 

Because inflation and mortgage rates are lessening in combination with the strong job market, there is no market crash forthcoming. With household income growth and new construction balancing out home prices, properties will become more affordable.

The bottom line, according to Realtor.com, is that “the dramatic swings and wild gyrations in the housing market are expected to taper off as the real estate ecosystem continues to slow.”

In our January recap, Haven will take a closer look at how the U.S. economy is affecting the current housing market.