Housing Market Predictions For 2023: When Will Home Prices Be Affordable Again?

Forbes Advisor Staff

It’s May, but the spring homebuying season has yet to bloom—and it may turn out to be a total dud.

Mortgage rates increased 15 basis points in April, while pending and existing home sales slumped in March. Though the median existing-home sales price edged lower year-over-year for the second consecutive month—a promising sign for home shoppers—substantial, nationwide price declines are likely not in the cards.

Tight inventory issues continue to keep prices high, perpetuating affordability challenges for many, especially first-time homebuyers. For one, the nation’s housing supply remains limited—and probably will remain so for at least the near future—due, in part, to those who purchased homes in recent years at record-low interest rates staying put.

Though home prices are not as eye-popping as in early 2022, how much further home prices dip in 2023 will depend on the housing market region and where mortgage rates go.

Housing Market Forecast for May 2023

As we move through spring homebuying season, buyers and sellers remain at a standoff.

Persistently high mortgage rates and home prices continue to put off many prospective homebuyers as fears of ongoing inflation, bank sector volatility, weakening economic growth and an impending recession hang in the air.

Meanwhile, the Federal Reserve voted to raise its key interest rate by one quarter of a percentage point on May 3, a move in line with most housing experts’ predictions. The Fed also signaled that it may pause rate hikes for the remainder of the year should inflation continue to fall. A Fed rate hike has an indirect impact on long-term home loans, such as 30-year, fixed-rate mortgages.

These circumstances have put a strain on the housing market, which remains a mixed bag.

On the one hand, home shoppers received good news, with the median existing-home sales price declining 0.9% to $375,700 in March compared to a year ago, according to the National Association of Realtors (NAR). This is the second consecutive month of year-over-year home price declines after a 131-month streak of record increases.

On the other hand, total existing-home sales dipped 2.4% from February to March and are down 22% from a year ago, per NAR.

“Home sales are trying to recover and are highly sensitive to changes in mortgage rates,” said Lawrence Yun, chief economist at NAR, in a report. “Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”

Some Experts Foresee a Sluggish Housing Market Recovery

Following several weeks of declines in March and early April, mortgage rates edged higher in recent weeks, reaching 6.43% the week ending April 27, according to Freddie Mac.

“If current economic conditions persist, with elevated mortgage rates and home prices amid scarce inventory, the market is likely in for a long, slow climb and a few bumps along the way,” said Danielle Hale, chief economist at Realtor.com, in an emailed statement.

One of those bumps includes the new mortgage fee rules imposed by the Federal Housing Finance Agency (FHFA). Beginning May 1, conventional mortgage borrowers who place between 5% and 25% down will pay more in fees—also known as loan-level price adjustments (LLPAs)—than those who put down less than 5%.

Though the Biden-Harris administration revamped the existing mortgage fee rules to make homeownership “more attainable and affordable for more low- and middle-income borrowers” the change has drawn criticism from some housing experts as the higher fees will hit people considered less risky.

While it remains to be seen how the mortgage fee changes will affect home shoppers, mortgage application activity at the moment remains low.

“Both conventional and government home purchase applications increased last week. However, activity was still nearly 28% below last year’s pace,” said Joel Kan, vice president and deputy chief economist at Mortgage Bankers Association.

Even so, some experts predict a slow recovery may soon be underway.

“The 30-year fixed-rate mortgage increased modestly for the second straight week, but with the rate of inflation decelerating rates should gently decline over the course of 2023,” said Sam Khater, chief economist, in a press statement. “The prospect of lower mortgage rates for the remainder of the year should be welcome news to borrowers who are looking to purchase a home.”

Housing Inventory Outlook for May 2023

Low housing inventory has been a challenge since the 2008 housing crash when the construction of new homes plummeted. It still hasn’t fully recovered—and won’t in 2023.

Housing supply holding steady at near historic lows has propped up demand compared to other downturns, consequently sustaining higher home prices.

“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group.

At the current sales pace, unsold inventory is unchanged from March at a 2.6-month supply, according to NAR. Though up from 2.0 months a year ago, supply is low by historical standards, especially in the face of pent-up demand.

With reportedly 85% of homeowners sitting on mortgage rates below 6%, industry experts have a gloomy outlook on when inventory will eventually normalize.

“We think that it is highly unlikely that the inventory problem will be resolved in 2023,” says Macdowell.

Housing Starts Forecast 2023

At the same time, there are positive signals in the homebuilding realm. Single-family construction starts rose for the second consecutive month, increasing 2.7% in March, and applications for building permits increased by 4.1% from the previous month, according to the U.S. Census Bureau and HUD.

The latest builder outlook data reflected optimism as well.

The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment ticked up a point, from 44 to 45. This is the fourth month-over-month increase following 12 consecutive months of declines.

Even so, builder confidence is still considered low—50 or above means more builders see good conditions ahead. Nonetheless, these consecutive upticks signal a positive trend in new-home construction as the apparent demand for new homes—which surged 9.6% in March—is likely due to a retreat in mortgage rates and tight existing-home inventory.

Also, the Federal Reserve isn’t helping matters with its ongoing rate hikes. At a semiannual hearing before the Senate Banking Committee, Federal Reserve Chair Jerome Powell addressed questions about the Fed’s aggressive monetary tightening policies in its efforts to rein in inflation.

In an exchange with Senator Raphael Warnock (D-Ga.), Powell acknowledged that raising the central bank interest rate increases borrowing costs for companies that develop new housing and makes financing and expanding production for suppliers more expensive. He also conceded that elevated mortgage rates discourage homeowners with low fixed-rate mortgages from selling their homes.

“Homeowners, homebuyers, lenders, as well as builders, are trying to adapt and predict interest rates, home prices, supply, demand and the potential for a Fed-induced recession,” says Macdowell. “As a result, builders may be reluctant to start new projects that would bring needed housing product to the market.”

Will the Housing Market Crash This Year?

Due, in part, to the ongoing inventory crunch keeping home prices elevated, many economists predict the housing market is more likely to correct itself from the double-digit percentage jumps in home prices we’ve seen over the past few years rather than crash.

The latest S&P CoreLogic Case-Shiller Home Price Index posted a negligible month-over-month national price growth reading of 0.2%, following seven consecutive months of declines. Even though year-over-year prices are higher, price appreciation has decelerated recently.

Nonetheless, experts say whether home prices rise or fall in the coming months will likely remain region-specific. For example, expect the steepest declines in areas that experienced big price booms during the pandemic, such as Austin, Texas; Phoenix; and West Coast metro areas.

“Home prices continue to rise in regions where jobs are being added and housing is relatively affordable,” said Yun. “However, the more expensive areas of the country are adjusting to lower prices.”

Additionally, other experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes. Consequently, the likelihood of a housing market crash is low.

“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow.

In a housing market crash, you would typically see a 20% to 30% drop in home prices and a decline in home sales—far more than what’s currently happening. Another crash symptom that’s been missing is a jump in foreclosure activity.

“We assign a low(er) probability of a housing market crash in 2023, since a ‘crash’ would likely be the result of mortgage defaults, foreclosures and forced property liquidations,” says Macdowell.

However, the possibility of an economic downturn poses a concern.

“We think that the most significant risk to the near-term market (and housing market) outlook is the potential for a severe recession and/or prolonged stagflation,” says Macdowell.

Will There Be a Lot of Foreclosures in 2023?

Though still below pre-pandemic levels, foreclosures have been edging up since the expiration of the Covid-19 foreclosure moratorium in September 2021.

In the first quarter of 2023, foreclosures climbed 6% from the previous quarter and were up 22% from the first quarter of 2022, according to ATTOM, a property data provider. March foreclosures were up 10% from a year ago and 20% between January and February.

“This unfortunate trend (in foreclosure activity) can be attributed to a variety of factors, such as rising unemployment rates, foreclosure filings making their way through the pipeline after two years of government intervention and other ongoing economic challenges,” said Rob Barber, chief executive officer at ATTOM.

Even though foreclosures are on the rise, Barber noted that the significant equity many homeowners still have should help prevent increased levels of foreclosure activity.

When Should I Buy a Home in 2023?

Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.

Use a mortgage calculator to estimate your monthly housing costs based on your down payment and interest rate.

Trying to predict what might happen this year is not the best homebuying strategy. “Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed,” says Neda Navab, president of the U.S. region at Compass, a real estate tech company.

Navab expects home prices in the hotter markets during the past few years to decrease somewhat, but she doesn’t expect a widespread, national price decline like what followed the 2008 financial crisis.

Instead of waiting for much lower prices, experts suggest buying a home based on your budget and needs. If you find a home you love in an area you love, and it also fits your budget, then chances are it might be right for you. However, if you make too many sacrifices just to get a house, you may end up with buyer’s remorse, potentially forcing you to offload the house.

Tips for Buying in Today’s Housing Market

Even as prices soften, you may realize that the area where you want to buy a home is still out of reach, so it’s important to be flexible.

“If you badly want a house and can work remotely or switch jobs, moving to lower-priced housing markets is a good idea to consider,” says Robert Frick, corporate economist at Navy Federal Credit Union. “Millions of Americans have done that already.”

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Source : Forbes