(NerdWallet) – The 2020s have mistreated homebuyers. 2023 could mark a tipping point where the housing market shakes them more fairly. Here are real estate trends to watch out for in the coming year.
reasons for optimism
The outlook for home buyers is better than it has been since the pandemic began.
“There will be some things for buyers to look forward to in 2023,” wrote Danielle Hale, Realtor.com’s chief economist, in her housing forecast. “There will be more homes for sale, homes will likely take longer to sell, and buyers won’t face the intense competition that has been commonplace in recent years.”
Matthew Speakman, senior economist at Zillow, noted that competition has eased and bargaining power is shifting from sellers to buyers. “This means in many cases buyers won’t have to settle for the first home they get a bid for, and inspection and financing risks are back on the table,” he said via email.
Lisa Sturtevant, chief economist at Bright MLS, a multi-registration service provider in mid-Atlantic states, warns that even if buyers have more bargaining power than they have in 2021, “it’s still a sellers’ market.” She says it’s crucial for buyers to obtain mortgage pre-approvals before bidding.
It can be worthwhile for buyers to look for deals on new-build homes, as builders are likely to cut prices or offer incentives like installment buybacks. Here’s why: Homebuilders faced a growing number of cancellations in 2022 as mortgage rates rose dramatically while homes were being built. Buyers signed purchase agreements when interest rates were low, but prices had risen past the affordability point by the time the houses were completed.
Mortgage rates could flatten or even fall
This year, the Federal Reserve raised the federal funds rate by 4.25 percentage points to curb inflation. Mortgage rates rose by a smaller amount: the 30-year mortgage averaged 3.21% in the first week of January, peaked over 7% in October and November, and fell to 6.34% in the second week of December.
Those high mortgage rates marginalized many potential buyers, and home sales plummeted as fewer people could afford to buy. Some forecasters believe that lower interest rates could reignite those homebuying dreams in 2023.
Fannie Mae, Freddie Mac and the National Association of Realtors all forecast a gradual decline in mortgage rates in 2023, with 30-year mortgages averaging between 6.1% and 6.5% in the fourth quarter.
The Mortgage Bankers Association is forecasting a more abrupt decline, with the 30-year mortgage averaging 5.2% in the fourth quarter of 2023.
Be skeptical about these predictions. Those forecasters were way off the mark a year ago when they projected that the 30-year mortgage would rise from 5% to 5.3% on average in the fourth quarter of 2022. They did not anticipate how aggressively the Fed would raise interest rates and the accompanying hike in mortgage rates.
No clear trend in prices yet
Unlike mortgage rates, real estate prices vary significantly from place to place and season to season, making them difficult to predict. For simplicity, let’s look at national forecasts that predict what will happen to house prices from late 2022 to late 2023. The forecasts vary to an amazing extent.
At one end of the spectrum, Realtor.com forecasts the median home price to rise 5.4%. The National Association of Realtors is forecasting a price increase of 2.5%.
Bright MLS’ Sturtevant forecasts prices to rise 0.3%. She believes we could see an uptick in demand from “people who took a wait and see approach at the end of 2022 and are coming back into the market next year” as interest rates stabilise. These buyers would compete for a limited supply of homes for sale and set a floor on prices.
At the other end of the spectrum, John Burns Real Estate Consulting forecasts house prices to fall 20% to 22% from their spring 2022 peak, and Zonda, a real estate consulting firm, forecasts a 15% drop from the peak. These companies don’t expect the full decline to occur in 2023; Prices may fall through 2024.
Rick Palacios Jr., director of research for John Burns, noted in a podcast interview that the median price for existing homes increased about 40% from spring 2020 to spring 2022. In his view, a 20% drop wouldn’t be surprising after such a rapid rise in prices.
“We squeezed a decade of house price increases into two years,” Palacios said on Altos Research’s Top of Mind podcast.
Rate lock-in will depress inventory
About 75% of outstanding mortgages have interest rates below 4%, Sturtevant says. It would “take a lot of enticement” for these owners to sell their homes and swap their low-interest mortgages for home loans with interest rates of 6% or more. In real estate parlance, this phenomenon is called “rate lock-in” and has at least two notable implications.
First, it contributes to “a significant decrease in existing homes coming to the market as inventory for sale,” Zillow’s spokesman said. When people keep their homes off the market, they reduce the supply of homes for sale. If demand stays the same, house prices will resist falling.
Second, homeowners may be tempted to become landlords, wrote Taylor Marr, Redfin’s associate chief economist, in the real estate agent’s 2023 forecast. “Many homeowners rent their homes rather than sell them because they don’t want to give up a low rate. There will be an influx of single-family homes for rent,” he predicted.
What makes salespeople successful
Most prospective sellers have to deal with fixed-rate mortgages and reconcile trading a lower-rate mortgage for a higher-rate loan. That’s not the only psychological hurdle that successful salespeople will overcome.
“Sellers in this environment will likely need to readjust their expectations and pick buyers where they are if they want to sell quickly,” Speakman said. “Gone are the days when sellers could charge almost any price and sell in days if not hours. The record-breaking increase in value we’ve seen over the past three years means there’s plenty of room to drive prices down and still make big profits on their property.”
Sturtevant says it’s important to value a home “appropriately – for this market, not last year’s market”. Buyers are making offers based on recent sales, which are likely to be lower than spring or summer 2022 prices.
Sellers have already accepted appraisal, financing and inspection contingencies, Realtor.com’s Hale wrote in her forecast, and have been more willing to pay buyer closing costs and compromise on the timing of closing.
And buyers insist that sellers leave their homes in good condition. “Notably, newer sellers were more likely to report making repairs before listing, and also more likely to make or pay for repairs during the contract period,” Hale wrote. “In short, buyers’ budgets are being stretched to the limit, and sellers who understand this and help buyers get a move-in-ready home will have an advantage.”
Finally, Jerimiah Taylor, vice president of real estate and mortgage services at real estate marketplace OJO Labs, recommends buying when you’re ready to buy, rather than waiting for prices to fall to the cycle’s lowest levels.
“Ultimately, the biggest mistake I think prospective home buyers make is waiting and trying to time the market,” he says. The home’s value will almost certainly be higher in seven or 10 years, obscuring hills and valleys in price, he says.
https://www.wane.com/news/for-home-buyers-2022-was-brutal-why-23-could-be-a-bit-better/ For homebuyers, 2022 was brutal. Is it getting better?