LOOKING TO BUY OR SELL IN 2023?
We’re rapidly closing out Q3, and the optimism that accompanied the first month of 2023 is being tempered with some major reality checks. Some sources forecast big price drops reminiscent of the Great Recession, but the overwhelming majority of Americans -- buyers struggling with higher costs, sellers reluctant to give up their rock-bottom mortgage rates, and shell-shocked tenants who have endured years of rent hikes-- won’t feel much of anything in the remainder of 2023, except perhaps comfortably numb.
At the close of Q2, @claretrap of Realtor.com made these chilling predictions:
The number of homes for sale is dropping by 5% this year;
Home sales are anticipated to fall 15.8% this year to about 4.2 million sales. This figure would represent the smallest number of homes sold since 2012;
New constraints on qualifying for credit leaves new building dead in the water-- new housing is expected to dip 19.6% compared with 2022;
These projections are based on 30-year fixed loans from Freddie Mac, assuming buyers put 20% down, property taxes, insurance and other costs not included.
To understand the current financial landscape, comparisons are needed. As fears of recession swirl at summer’s end, we may have an early-aughts sense of déjà vu. Surging, then leveling-off home prices are a common factor, but here’s the fall-out: today’s buyers face monthly mortgage payments that may literally be double what they were just before the COVID-19 pandemic began. The result is that many potential buyers aren’t feeling the love and refuse to bust a move. There simply aren’t enough homes on the market for sale today. Who’s going to sell their home-- remembering that most sellers are also buyers -- when they’re sitting pretty on a mortgage rate around 3%? And then there’s the inventory issue.
During the Great Recession, available homes were more plentiful than buyers, a complete reverse of today’s real estate climate. Seventeen years ago or so, prices dropped about 26% the space of five years for existing homes. Today, buyers may still be willing to bid above the asking price for a move-in ready home in a sweet hood, in spite of the obvious financial challenges. But the definitive factor -- an acute shortage of housing -- may prevent a crash.
On the plus side, housing experts report that the foundation of today’s market is stronger than that of the mid-2000s, the current downturn being due to higher mortgage interest rates which jumped from below 3% in 2021 into the high 6% range, perhaps even reaching slightly above 7% by year’s end. (Ouch, again.) These same experts advise potential clients to take comfort in the reassuring (?) fact that recent mortgages are much safer than those of the past close-to-two decades, when subprime mortgages scorched new homeowners with payments that doubled and even tripled, resulting in a tsunami of painful foreclosures and short sales. By comparison, the vetting process is far more stringent today, and many of today’s homeowners are sitting on record amounts of equity.
John Burns Real Estate Consulting notes a decline in prices for newly built housing in markets like Phoenix, Boise, and San Antonio. Data suggest that even the downtown areas of large cities may be due for an “adjustment” reflecting the lack of movement in the marketplace. But don’t pop the cork on the bubbly yet: prices may rise, not fall, in the Midwest, since demand is fierce for these more affordable properties.
There are lots of reasons that remembering the mid-1980s may make us cringe-- WHAM!, crunchy hair mousse, dress-for-success linebacker shoulder pads -- but none can top the 18.6% mortgage rate of September, 1982, according to Freddie Mac data. But most of us employ selective amnesia about the wardrobe choices and all the rest. What we choose to remember instead are the days when interest rates were below 3%. Obviously, for every point the rate bumps up, the buyer can afford a whole lot less house. Realtor.com estimates that buyers are paying about $900 per month more than they would have 12 months ago, for a home at the current median listing price. At the current rates, the median home price would need to drop by 31% to compute out to last year’s typical mortgage payment. For context, that would require a median home price of $280,000, compared with $405,950 for a current single-family home …anywhere but New York or California, of course, where a well-worn postwar-fixer-upper-possible-tear-down will cost you a cool mil, no questions asked. To turn back time two years ago, that same home would need to be 47% lower (about $215,000), and to estimate the monthly cost from three years ago, just before the pandemic, the house would need to be priced 49% lower, at around $206,000. Even in the boonies or the ‘burbs, not gonna happen any time soon.
It’s the death by a thousand cuts: even the smallest movement, a fraction of a percentage point, can mean the difference between deal or no deal. “Correction” is the word we’re hearing a lot these days. Low mortgage rates were the fuel that sparked the housing market into a wildfire during the pandemic. Lower rates gave buyers more purchasing power, so buyers bid higher than they otherwise would have. But…we all know what happened next. The prices climbed out of reach, and then came the great era of correction. Realistically, in spite of the U.S. Federal Reserve raising its rates to combat high inflation, many real estate professionals don’t anticipate that mortgage rates will inch up beyond 7% through Spring, 2024.
Our promise: we offer uniquely tailored support our clients by researching different lenders and different types of loans which may ease the sting. Specialized loan products, like those offered to veterans and first-time homebuyers, may bring the dream into reach, even as the Fed raises its baseline rate in an effort to slow the economy and dampen inflation. Now close your eyes, click your heels together three times, and repeat:
There’s no place like home,
There’s no place like home,
There’s no place like home….