With mortgage rates above 7% for the first time in 20 years, the pandemic-fueled housing boom came to an abrupt halt in 2022. The aftermath of accommodative monetary policy, soaring energy prices and Supply chain issues converged to drive inflation. to a boil. In response, the Federal Reserve raised its target interest rate by more than 4% within months, ending historically low mortgage rates and triggering a housing affordability crisis that is expected to continue into 2023 and beyond. of the.
But not all markets are created equal, and this year represents an opportunity for mid-tier cities, particularly in the Midwest, to stand out as affordability becomes the top concern for buyers. According to Lawrence Yun, chief economist of the National Association of Realtors, “after a big boom over the past two years, there will be virtually no nationwide change in house prices in 2023.” Yun expects some overvalued housing markets to deflate as more affordable cities in the Midwest continue to see substantial gains.
Mortgage rates will stabilize at the new normal
While experts disagree on exactly where mortgage rates will go in 2023, they all agree that we won’t see the historic lows set in 2021 anytime soon. Yun believes mortgage rates may have already peaked and expects them to slowly stabilize at 5.7% by the end of the year. At the other end of the spectrum, Danielle Hale, chief economist at Realtor.com, predicts that average rates will rise in early 2023 to 7.4% before falling back to 7.1% by year-end.
Since the pandemic, low interest rates have made rising home prices acceptable to buyers, which has lowered monthly mortgage payments. However, with rates nearly double what they were a year ago, affordability is plummeting. For example, a $400,000 mortgage a year ago at 3% interest would cost around $1,700 per month, while that same mortgage today at 6% would cost you $2,400 – a difference of $700 per month on the same house.
Home sales down
Soaring interest rates not only affect affordability, but also the number of homes available for purchase. According to Zillow researchers, “High mortgage rates don’t just push buyers to the sidelines, they pile up new inventory as homeowners decide to hold on to their current homes and low rates.”
Yun agrees with that assessment, predicting a 6.8% drop in home sales in 2023, with at least part of the slowdown due to homeowners not wanting to swap their sub-3% mortgage for a mortgage. much higher and decide to give up the sale. Hale predicts an even steeper decline, with 4.53 million existing home sales, down 14.1% from 2022 and the lowest level since 2012.
Investor demand is also falling. A year ago, homes were selling fast as a rising tide lifted all boats, but uncertainty in today’s market has reduced investors’ risk appetite.
Home price increases will slow significantly
While soaring house prices have contributed trillions to Americans’ net worth, it comes at the cost of pushing household budgets to breaking point. Experts agree that falling house prices provide a much-needed reset to a booming real estate market.
The post-pandemic era of double-digit annual gains in house price appreciation is coming to an end. After growing 17% nationwide in 2021 and nearly 10% in 2022, property prices are expected to moderate. “Half of the country may see small price increases, while the other half may see slight price declines,” Yun noted. For some markets where affordability is tough, like San Francisco, there’s even the possibility of a double-digit decline as rising interest rates put even entry-level homes out of reach for buyers.
Hale’s analysis of home prices is more optimistic, predicting a median home price appreciation of 5.4%, but still well behind recent years. She attributes the slowing growth to the skyrocketing cost of mortgage payments. According to the Realtor.com report, the cost of finance for a typical home will average $2,430 in 2023, or $500 more per month than in 2022, and nearly double the typical payment in 2021.
Affordable mid-tier cities will benefit
While the national housing outlook is bleak, the sun seems to be shining brightly on more affordable mid-tier cities, especially in the Midwest. While the Sun Belt’s major markets have dominated the headlines, attention is already shifting to smaller towns where mortgage costs still sit at less than 30% of total income. “As affordability has become a key driver of market supply and demand, places that still offer reasonable prices…should have the healthiest housing markets in 2023,” the report proclaimed. Zillow’s accommodation.
Prices in smaller metro areas, especially in Midwestern states such as Ohio, Pennsylvania, Kansas and Illinois, have yet to reach the extremes seen in metros such as New York and San Francisco. or Sun Belt leaders such as Phoenix and Dallas. Those with work-from-home jobs or the ability to move to less expensive areas appear to be doing so, with shopping across multiple markets accounting for more than 60% of pageviews in Q3 2022 according to Realtor.com.
As affordability takes center stage in 2023, Hale predicts a flattening curve as overvalued markets slow and mid-tier cities thrive. It expects above-average price growth in many Midwestern markets, such as:
Cincinnati, Ohio – 6.1%
Des Moines, Iowa – 6.3%
Grand Rapids, Michigan – 10.0%
Indianapolis, Indiana – 7.8%
Kansas City, Missouri – 7.2%
Louisville, Kentucky – 8.4%
Madison, Wis. – 9.0%
Syracuse, NY – 6.1%
Wichita, Kansas – 7.0%
Rental market still hot, but relief in sight
While rising home prices are a double-edged sword for landlords, they have been a consistent negative for renters as record vacancy rates and low inventory have kept rental prices up. According to Hale, “year-over-year rent growth slowed to a single-digit pace in late summer 2022.” Although vacancy rates are starting to rise, she expects rents to continue to rise in 2023, up 6.3%, due to excess demand and limited supply, d especially as more and more potential buyers remain in the rental market as housing affordability continues to decline.
However, some relief may be in sight as more multi-family inventory comes online and vacancy rates start to rise. Zillow research suggests that as homebuyer demand for new construction dries up, builders are increasingly turning to multifamily construction and rental homes, which will help ease the housing shortage. supply and term to stabilize rental rates.
A year of moderation?
Since 2020, the U.S. housing market has been on a rollercoaster ride, hitting highs of frenzied demand and falling interest rates during the pandemic. Then abruptly halted by soaring interest rates thanks to out-of-control inflation. With signs of stabilization in interest rates and inflation, perhaps 2023 will bring a sigh of relief and a return to normalcy for the housing market. Or at least as close to normal as you would expect in today’s world.
This article was produced and syndicated by Wealth of Geeks.