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Housing market: What to expect in 2023

IFM_ Housing market
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

According to the National Association of Realtors, mortgage rates continued to decline in the United States, the new house sales data show that more buyers are entering the market. For the first time in almost 11 years, home sale prices decreased year over year (y-o-y) in February, and total home sales experienced their greatest monthly percentage gain since July 2020. However, many experts have mixed opinions on how much further home values will fall this year.

The data shows that there is still a shortage of homes in the country. Those who bought homes recently at historically low loan rates are continuing to live in them. The difficulty of affordability for many people, especially first-time homeowners, is perpetuated in part by tight inventory constraints that prevent prices from declining.

As property prices continue to rise year over year, they are not as startling as they were at the beginning of 2022. Experts say, how much further home prices dip in 2023 will likely depend on where mortgage rates go.

Housing market forecast

Housing experts continue to keep a close eye on the economy as the industry moves to the first half of 2023 after being pulled in many different directions by factors like high inflation, high-interest rates, persistent geopolitical uncertainty, and fear of recession.

However, there are some promising trends developing. According to the National Association of Realtors (NAR), the median price of an existing home sold in February decreased by 0.2% to USD 363,000 dollars from the same month last year. This brings to an end a record-breaking run of 131 straight months of year-over-year gains. Despite a 14.5% increase from January to February in total existing-home sales, which ended a 12-month streak of declining sales. According to NAR, these sales were down 22.6% from a year ago.

According to preliminary data from the US Census Bureau and the US Department of Housing and Urban Development (HUD), housing starts increased by 9.8% in February, contributing to the creation of much-needed inventory. According to Freddie Mac, mortgage rates decreased slightly in mid-January and were 6.42% for the week ending February.

Housing inventory outlook

Since the housing crash of 2008, when the construction of new homes plummeted, there has been a problem with low housing inventory. It has not entirely recovered—and won’t in 2023. In contrast to earlier downturns, the housing supply has remained stuck at close to historic lows, supporting demand and maintaining higher home prices.

Inventory has a 2.6-month supply at the current sales pace, which is low by historical standards but up from 1.6 months a year ago, according to NAR. Industry analysts have a pessimistic assessment of when inventory will eventually stabilise based on this and other data.

“I believe that we are likely to see low inventory continue to vex the housing market throughout 2023,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data. And with 70% of homeowners sitting on a mortgage rate of 4% or less, Sharga says we are unlikely to see an inundation of homes soon, the Forbes Advisor reported.

On the other hand, there are some positive signs present in the field of home construction. According to the US Census Bureau and HUD, single-family construction which started in February jumped by 9.8% and building permit applications by 13.8% after five straight months of losses.

The most recent data from NAHB/Wells Fargo Housing Market Index (HMI) on builder outlooks also showed optimism. The HMI index, which measures builder confidence, increased by two points, from 42 to 44. After 12 straight months of declines, this is the third consecutive month-over-month improvement. Experts say, there will need to be more consecutive upticks before seeing a meaningful resurgence in new construction because builder confidence is still low. An index of 50 or above suggests more builders predict excellent conditions ahead.

Experts also stated that the Federal Reserve is making matters worse by consistently raising the federal funds rate. Federal Reserve Chair Jerome Powell answered inquiries regarding the Fed’s strong monetary tightening strategies in its attempts to control inflation during a semi-annual hearing before the Senate Banking Committee.

During a conversation with Senator Raphael Warnock, Jerome Powell noted that boosting the central bank interest rate increases borrowing costs for businesses that build new houses and makes financing and expanding manufacturing for suppliers more expensive. Additionally, he acknowledged that high fixed mortgage rates deter homeowners from selling their homes when they have a low fixed-rate mortgage. These conditions all put further pressure on the inventory, Jerome Powell explained.

“The bottom line is that there really isn’t a likely scenario that leads to inventory levels approaching historically normal numbers in 2023, which means that prospective homebuyers are still going to have to work hard to find something to buy,” says Sharga.

Will the housing market crash?

Due to the continued inventory problem that is keeping home prices elevated, many analysts anticipate that the housing market is more likely to correct itself from the double-digit percentage rises which are seen in home prices over the past several years rather than crash.

“Home prices will be steady in most parts of the country with a minor change in the national median home price,” Sharga said.

However, some experts who follow the housing market predict that some areas may experience an increase in home sales and prices, particularly in places where home values have remained reasonable over the past few years when compared to the median income.

“We are estimating about a 5% drop nationally. Some markets, believe it or not, will probably see prices continue to increase,” Sharga added.

Senator Raphael Warnock agrees, pointing out that there would be increases or decreases in housing prices depending on the region, with cheaper places likely to witness price rises and more costly ones likely to see falls.

According to some analysts, a significant proportion of borrowers have positive equity in their houses, placing today’s homeowners in a considerably stronger position than those who were recovering from the 2008 financial crisis. As a result, there is little chance of a home market crash.

“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,” Nicole Bachaud, an economist at Zillow, said.

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.

“I think we’re more likely to see the market cool, rather than crash,” Sharga said.

Will foreclosures increase in 2023?

Even with the gradual increase in foreclosures that followed the COVID-19 foreclosure moratorium’s expiration in September 2021, they are still below pre-pandemic levels. The Year-End 2022 US Foreclosure Market Report from ATTOM Data shows that the number of foreclosures was 34% lower in 2022 than it was in 2019.

“It seems clear that government and mortgage industry efforts during the pandemic, coupled with a strong economy, have helped prevent millions of unnecessary foreclosures,” said Sharga.

Foreclosures increased by 2% from December to January 2023, up 36% from the previous year. The fact that many homeowners, including those who are having trouble making payments, have seen a significant increase in their property values recently is a significant distinction between the current housing crisis and that of 2008. That means they still have equity in their homes and are not underwater—when they owe more than the house is worth.

Sharga noted that borrowers in foreclosure are leveraging the positive equity in their homes by refinancing their homes or selling for a profit. “It seems likely that this is a trend that will continue in 2023,” Sharga said.

When should I buy a home in 2023?

In any market, purchasing a home is a very personal choice. Homes are typically the biggest single investment that a person will make in their lifetime, therefore it’s important to have a strong financial foundation before making a purchase. Based on your down payment and interest rate, use a mortgage calculator to determine your estimated monthly housing costs.

Neda Navab, president of the US region at Compass, a real estate tech company, said, “Trying to predict what might happen this year is not the best home-buying strategy. “Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed.”
Neda Navab anticipates a slight reduction in home prices in the hotter markets of recent years, but she does not anticipate a widespread, nationwide price decline similar to that which followed the 2008 financial crisis.

Experts advise buying a home based on your wants and budget rather than holding out for substantially lower pricing. It is possible that a house you like in a neighbourhood you like that also meets your budget is the one for you. But, if you make too many compromises to obtain a home, you can experience buyer’s remorse and be forced to sell the property.

Top markets at risk of home price decline in 2023

According to the CoreLogic Market Risk Indicator (MRI), which provides a monthly assessment of the overall health of the nation’s housing markets, Bellingham, Washington, is at extremely high risk (70%-plus chance) of experiencing a decrease in home values over the coming 12 months. Other areas with a very high probability of price drops include Crestview-Fort Walton Beach-Destin, Salem, Merced, and Urban Honolulu in the United States.

A probability score (from 1 to 100) is provided by CoreLogic Market Risk Indicators, a multi-phase regression model, for the likelihood of two scenarios for each metro: a price fall of more than 10% and one of less than 10%. The likelihood of a price cut increases with a score. CoreLogic is a leading global provider of property information, analytics, and data-enabled solutions.

To make homes more accessible, the housing market may require ‘a correction.’ Since the beginning of 2012, the national housing market in the United States has increased annually. All 50 states and the District of Columbia saw an increase in home prices during the second quarters of 2021 and 2022. Buyers continue to raise property prices in today’s housing market, which causes homes to sell quickly. To win bidding wars in the fiercely competitive home market during this pandemic, the United States witnessed overzealous purchasers submit offers before visiting the property and waive contingencies.

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