The good news & the bad news
The words jumped out at me from an old sheet of lined notepad paper in a thick file that I had kept through the years, “This business is about challenging times. Either you’re in one now, or you’re just coming out of one, or you’re getting ready to go into another one. It’s all about about timing.”
The notes, jotted down from a long-forgotten conference speaker in the mid-80’s after just opening my brokerage, resonated with me. The real estate industry had just come off 19% mortgage rates as the feds sought to control inflation, yet there was a sense of optimism as brokers and realtors went about their business.
Fast forward to today and the industry has enjoyed some really good years for quite some time. Despite what some “Chicken Littles” would have us believe; the sky isn’t falling. It’s best described as “normalizing.”
For the coming year, there is good news and bad news. On the good news front, with an anticipated slowdown, there will be more inventory on the market. The number of existing homes for sale is expected to increase by 22.8%. However… the bad news is that the high cost of housing affordability will mean that it’s not going to be a bonanza for buyers. Mortgages will be out of reach for many buyers and the year is not going to become the buyer’s market many brokers and agents were predicting (hoping).
Realtor.com® describes it best by saying next year’s housing market could become a “nobody’s-market,” meaning it won’t be favorable to buyers or to sellers. As the year comes to a close existing home sales for 2022 will be approximately 5.3 million, which is down 13.8% over 2021. Their prediction is that 2023 will see an annual total of 4.5 million, the lowest level since 2012 with 4.66 million home sales.
There are three primary drivers of housing affordability; income, home prices, and mortgage rates and all three have hit home buyers hard. This trio, along with added inflationary challenges, will have the biggest impact on many would-be homebuyer’s plans in 2023.
According to data released by the National Association of Realtors (NAR), the monthly mortgage payment on a typical existing single-family home with a 20% down payment was $1,840 – up 50% year-over-year. Lawrence Yun, chief economist at NAR said, “The mortgage rates have more than doubled and it’s limiting the homebuyers’ ability to take out a mortgage.”
Independent research firm, Capital Economics, projects an 8% decline in home prices, and believes the pendulum will shift toward some buyers. “Given that we are unlikely to see an improvement in affordability anytime soon, many buyers will be priced out of the market, while others will simply be unwilling to make a purchase,” it said. “As bidders become scarcer, market power will shift further from sellers to buyers.”
Who will really be the winners and losers in the coming year? Interestingly, the contrast is at the market’s outer edges. The greatest impact will be felt more at the lowest and highest average sales price (ASP).
The tightest market is the lower average ASP. Especially hit is the entry-level segment which is expected to be even more challenged. Not only is there very limited inventory in this range, but buyers are competing with institutional buyers who continue to snap up nearly one out of five lower ASP homes. In this range, home affordability is critical as income is not keeping up with inflation and the down payment funds needed for a mortgage is a challenge.
By contrast, the higher ASP range is expected to remain brisk in 2023. According to Bloomberg, a record 8.2% of U.S. homes sold for $1,000,000+ which is almost double the number from two years ago. In these transactions, mortgage rates are often not an overriding factor. Interestingly, a well-known broker in a higher-priced market recently confided to me that the stock market fluctuations impact their business much more than interest rates and in times when it is down, many clients feel more comfortable with their money invested in real estate. This higher ASP growth trend is expected to continue well into the new year as well-heeled buyers look to snap up potential bargains.
For many brokers, establishing themselves in the lucrative higher end of the market is a challenge. There is a movement among many brokers to explore affiliations, franchising, alliances, and other avenues to take advantage of the changing opportunities. There has also been an increased interest in brokers exploring merging with or acquiring other players in their market as a foray into different price points within their market.
So whatever your plans, looking ahead into the new year, get ready for a wild ride and be thankful 2023 won’t see 19% interest rates!
Happy Holidays – May you be happy, healthy, and prosperous in the year ahead!
This article was written by Rick Ellis and featured in RealtyBizNews.
A look to 2023 from realtor.com®
It’s going to be a strange year for the real estate industry, according to the 2023 Forecast by realtor.com®.
The predictions from realtor.com® is that interest rates will continue to remain in the 7%+ range while home sales will be slower. However, both home prices and rents will continue to increase next year along with modest inventory increases.
Chief Economist Danielle Hale said, “Compared to the wild ride of the past two years, 2023 will be a slower-paced housing market, which means drastic shifts like price declines may not happen as quickly as some have anticipated. It will be a challenging year for both buyers and sellers—but an important one in setting the stage for home sales to return to a sustainable pace over the next two to three years.”
To read the Housing Report in full, click here.
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