In order to understand the real estate market trends for 2023 let’s take a look at some economic factors: Interest rates, affordability, housing shortage and home sales.

Interest Rates

During 2022, the Federal Reserve Bank increased mortgage interest rates 7 times as seen in this chart. Once the rate of inflation was going up they moved forcefully and raised the fed funds rate by three percentage points in about six months. The goal: “to reduce red-hot inflation rates that are eating into the purchasing power of everyday Americans without sparking a recession.”

However, the 2022 year end latest numbers show a very pessimistic view of the economy as we enter 2023. The S&P 500 closed out 2022, its worst calendar year performance since 2008, on a low note as it tossed 20% . The Nasdaq Composite lost 33%, Real Estate Investment Trusts lost 25%, and Bitcoin lost 60% of its value.

Mortgage Rates Forecast for 2023

The Federal Reserve hiked its benchmark interest rate seven times in 2022 by December. With inflation still above 7% as of November, the Fed recently signaled plans to continue raising the federal funds rate into 2023, though likely at smaller increases.

“Looking toward 2023, we can expect financial market volatility to continue until investors have more clarity about the economy’s direction,” said George Ratiu, Realtor.com’s director of economic research, in an emailed statement. “With the Fed committed to monetary tightening until inflation is decidedly moving toward 2%, borrowing costs will remain elevated, keeping housing affordability at the top of the year’s list of challenges.”

Here’s how other experts predict market conditions will affect the 30-year, fixed-rate mortgage in the coming months:

• Compass U.S. region president, Neda Navab: There have been signals that mortgage interest rates may be at or near their peak, given recent encouraging news around inflation and a corresponding drop in the U.S. Treasury yields that help set mortgage rates. A sustained drop could push mortgage rates into the 5% range late in the second quarter or in the second half of 2023, but that’s definitely not guaranteed.
• Mortgage Bankers Association (MBA):  “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”
• National Association of Realtors (NAR) senior economist and director of forecasting, Nadia Evangelou: “If inflation continues to slow down–and this is what we expect for 2023–mortgage rates may stabilize below 6% in 2023.” Many buyers want to believe that the 3% may come again, however, we don’t expect to see that.
• Freddie Mac: Forecasts the average 30-year mortgage rate to start at 6.6% in Q1 2023 and end up at 6.2% in Q4 2023.
• Hedge fund wizard Michael Burry who predicted the 2008 Housing Crash suggested that inflation, which has cooled in recent months, will surge again whenever the Federal Reserve decides to cut its benchmark interest rate. The next meeting is slated for Jan. 31.“Inflation peaked. But it is not the last peak of this cycle,” Burry tweeted on Sunday. “We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition.“Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard,” Burry added. In November, Burry argued the US economy was essentially doomed to a “multi-year recession” because the Fed lacked any good options to avoid a downturn.The general consensus among experts is that once the FED feels that inflation has slowed down, that they will cut rates once again. Causing yet again another inflation spike. 

Affordability

The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.

The rule of thumb in residential real estate is that in order to calculate how much house you can afford is using the 28/36 rule, which states that you shouldn’t spend more than 28% of your gross pre tax income on home related costs and no more than 36% on total debts including mortgage, credit cards and other loans, such as auto and student debt.

In the west of the U.S we see the income ratio well above 28% at 39.5%. In addition, as of September 2022, the national index was below 100, which means that the typical family can no longer afford to buy the median-priced home. An index below 100 means that a family with a median income had less than the income required to afford a median-priced home.

As interest rates have spiked we see the decline of the housing affordability index.

According to the National Association of Realtors, affordability was down in all regions from last month. The South region fell 7.7%, followed by the Midwest with a decline of 7.3%. The West was down 7.0%, followed by the Northeast, which had the smallest decrease of 3.8%.

Compared to one year ago, the monthly mortgage payment rose to $1,912 from $1,212, an increase of 57.8%. From a year ago, the monthly mortgage payment increased by $700. The annual mortgage payment as a percentage of income inclined to 25.9% this September from 17.0% a year ago. Regionally, the West has the highest mortgage payment to income share at 37.0% of income. The South had the second highest share at 25.9%, followed by the Northeast, with their share at 25.0%. The Midwest had the lowest mortgage payment as a percentage of income at 19.2%. Mortgage payments are not burdensome if they are no more than 25% of income.

 

Housing Shortage

Depending on who you ask, experts believe there is a nationwide housing shortage of between 2 million to nearly 6 million newly built homes.

Evangelou said the association estimates there’s a shortage of 5.5. million homes. The organization uses its housing shortage tracker to compare the supply and demand by the number of single-family housing permits issued for every two new jobs in 175 U.S. markets.

The spike on interest rates can also be blamed for the fact that homeowners wishing to upgrade or move to a different location find that the new mortgage payments will be substantially higher than what they currently have. Therefore, there is not longer an incentive upgrade or even downsize as mortgage payments are likely to be quite a bit higher than what they currently have.

Home Sales

According to the National Association of Realtors:

• Existing-home sales fell for the tenth consecutive month to a seasonally adjusted annual rate of 4.09 million. Sales slipped 7.7% from October and 35.4% from the previous year.
• The median existing-home sales price rose to $370,700, an increase of 3.5% from one year ago.
• The inventory of unsold existing homes retreated for the fourth straight month to 1.14 million at the end of November, or the equivalent of 3.3 months’ supply at the current monthly sales pace.

2023 Housing Forecast

According to many experts, 2023 will be a tough year for the real estate market, in particular for first time home buyers who will see their homeownership dream delayed. Although we are likely to see a cut in interest rates, gone are the days of 3%. The Fed may keep rates right or below 6%, home prices will remain somewhat stable since there is a housing shortage. Any interest rate cut will result in another spike in inflation, resulting in further harm to the overall economy.