There are lots of forecasts, predictions, rumors and fears surrounding the topic of Real Estate these days. I wanted to provide some in depth insight into many aspects, both internal & external that impact our industry. Of course Real Estate is local so what transpires in Phoenix, Arizona may be different than New York, Tennessee & Oregon. This will be a long read, but should prove worthwhile & informative.
First, let’s quickly recap the recent past:
We started off that year with dwindling inventory in the market and then COVID hit causing the market to stop abruptly, although temporary. In May, the flood gates opened back up and we saw pricing really take off in the second half of the year.
A whirlwind from start to finish, we saw Sellers hold the advantage and Buyers making drastic offerings to get their offers accepted. Appraisal Waivers, excessive bidding and post-possession all became commonplace.
The beginning reminded us of the year prior, but things began to change in the second quarter. Mortgage Interest Rates rose dramatically along with inflation, the stock market tumbled and buyer-demand weakened, which caused total sales to decline by nearly 25%. That led to prices rising year-over-year by 13% on average, but still 20% or so below peak levels earlier in the year.
What will 2023 look like? Well… I wish I had that crystal ball, but I will shed some light into some areas below:
Mortgage Interest Rates
Predictions are all over the board with this one… some feel we have already reached peak levels (November, 2022) and are on the way down while others expect to see rates hit 8.5% before we are out of the woods. Right now we are seeing about 6% for FHA/VA Buyers (depending upon credit score) and close to 7% for Conventional Financing. The National Association of Realtors’ economists think we will settle below 6% this year around 5.7%. Rates are impacted by inflation figures, which are 12-month rolling averages so as we move past Q1, we could see some positive effects. I personally do not think we will go north of 8% and I’d like to think we are in the 5% range for FHA/VA and 5.75% range for Conventional by summer.
When the market went bananas so did builder expectations… required deposits high, incentives nil and quality not always the best. Gone are the lotteries, drawings and online bidding for lots. Today we are seeing new home builders lower prices, offer incentives once again and the process to buy become much more user-friendly. Lumber costs have settled back down (around 50%), which helps their cost. There are 25% fewer new start permits forecasted for 2023. Looking back, 2010 – 2017 saw some lean years in terms of new homes being built, which is one reason market inventory got so low during the past couple of years, but we should remain more in a normal level this year.
Interesting fact… there are 930,000 apartments under construction across the country, which is the highest level since 1974. We saw approximately 25% more rental closings in the MLS for 2022, which makes sense as sales fell, but people still need to live somewhere. Many renters would love to buy, but higher interest rates and affordability concerns have them on the sidelines for now. We did see some relaxation (around 10%) in rental pricing overall during the second half of last year.
As mentioned, sales were down almost a quarter in 2022 year-over-year and some predictions point to even less in 2023. With an expanding population, not sure much lower we can go, but I hope we end up on par with 2022. This is an important sector to watch as it directly relates to incomes for many businesses affiliated with the real estate industry. Sagging numbers can lead to more layoffs and a deeper recession.
Woof… that’s how I feel about my portfolio’s performance in 2022. At this point, even small gains would be welcomed! This financial component has a big impact on real estate, albeit more in the luxury segment. However, even first time home buyers sometimes pull from 401K funds for down payment so if those funds aren’t there, homes won’t be purchased that otherwise would have.
Foreclosures & Short-Sales
Despite some “hot-take” headlines, I do not see a tsunami of foreclosures coming… two-thirds of the nation’s mortgages have interest rates under 4%. They’re affordable and value changes don’t impact that. Many still sit on lots of equity from gains in 2010 – 2021 so if they got into trouble, they could still sell on the open market. As for Short-Sales, I revert back to the low interest rate / equity position statements most have so making a move somewhere else now would not gain them any affordability.
We saw Investors of all kinds… mom & pop, hedge funds, institutions, equity groups, etc. all pause in the market during the latter part of 2022. Some say they are expecting another drop in prices Q1 ’23 so will wait and see what happens thereafter. Who knows, but the investors take 20+ percent of buying activity away, which plays a part in the reduced number of total sales.
We touched on this briefly within the Interest Rate section, but inflation is expected to reduce. This does not mean everything will become less expensive, it just means the rate of acceleration is falling back in line with normal numbers. Food, gas, utilities, insurance, travel and just about everything has gone up in the past couple of years. This disturbs affordability and is something to monitor.
We have already seen some ‘first-time homebuyer’ programs come out and more are expected in hopes they bring new buyers to the market. You could see more seller carryback situations and loan assumptions too. Challenging times brings about creativity so I anticipate more of that in this realm.
Layoffs, Mergers & Acquisitions
With less real estate transactions, you will see some companies lay off workforce or shut their doors. This tightening will also provide opportunities for mergers & acquisitions within the real estate business space.
We have seen municipalities and HOAs target STRs… the new regulations will make it more difficult to rent short-term in some communities and a saturated market could lead some to sell off rather than sustain the higher vacancy rates. This could give some additional inventory and options to owner-occupant home buyers.
Speaking of… inventory levels now are not bad. They are WELL below where we were in 2007/2008 when the market collapsed. Demand is there, just more on the sidelines waiting for interest rates to drop. I believe if rates fell to 5% tomorrow, buyers would be back out in droves causing a huge inventory shortage once again. We need builders to keep building even with lower sales forecasted and some of the short-term rentals and investors to turn over.
This may be the biggest topic for many. I expect prices to remain fairly flat this year. We could see some ebbing & flowing, but overall I think we stay fairly even by year end.
My final topic, this one is vital. If people don’t feel good about something, they tend to shy away. It’s natural instinct. Therefore, we need/want people to feel good about the direction of the economy, housing market, country, stock market, etc. If they do, then good things happen. If they don’t, then not so good things happen. This year will be interesting to see how people feel about everything. I think the result will be a mixed bag, hence lower sales and stagnant pricing.
What have we learned?
Patience is key in a market like this along with proper guidance. Having an experienced Realtor/Broker on your side will make a tremendous difference. You need to be educated, informed and represented properly.
If I can help, please give me a call… 623-203-2264.