January 3, 2023 – It is 2023! All year we have been hearing predictions regarding a coming recession caused by higher interest rates.

Economic Commentary

It is 2023! There are so many questions at the beginning of every year. For one, how long will it take for us to stop writing or typing 2022? Secondly, from that famous Seinfeld episode—for how long will we wish everyone a Happy New Year? Do we stop January 31st or later? Here is another – how long will it be until we can stop worrying about COVID? Believe it or not, the pandemic started just about three years ago. In early 2020, who thought we would still be dealing with COVID in 2023?

On the economic side, will there be a recession in 2023? All year we have been hearing predictions regarding a coming recession caused by higher interest rates. Yet, the economy has not been showing signs of a recession other than the slowdown in the real estate sector. Generally, the economy follows real estate. Therefore, if the real estate market bounces back this spring, we are less likely to see a recession. On the other hand, if rates stay stubbornly high and real estate sales continue to lag, that increases the risk of a recession significantly.

This week we will see the jobs report for December. Thus far, the job creation machine has hummed throughout 2022. Next week the December inflation numbers will be reported. A bit of a slowdown in job creation, wage inflation, and the overall inflation picture, would do a lot to bring us some better interest rate news. And lower long-term interest rates would be a big factor in bringing back buyers and sellers to the real estate market.

Weekly Interest Rate Overview

The Markets. Rates reversed course during the holiday week. For the week ending December 29, 30-year rates rose to 6.42% from 6.27% the week before. In addition, 15-year loans decreased slightly to 5.68%. A year ago, 30-year fixed rates averaged 3.11%, more than 3.25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The housing market remains in the doldrums with declining sales, inventory and prices. The declines in sales and deceleration in home prices began swiftly earlier in 2022 but have moderated more recently. While the intensity of weakness is moderating, the market continues to decline and forward leading indicators suggest housing will remain weak throughout the winter.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

The slowdown in home sales transactions that began as mortgage rates surged in 2022 is expected to continue, leading to a moderation in home price growth and tipping the housing market balance away from sellers. Additionally, moderation in home price growth will not be enough for the housing market to be a buyer’s market. Instead, homebuyers will enjoy advantages such as a growing number of homes for sale, but costs will remain high, challenging affordability at a time when overall budgets continue to be constrained. Homebuyers looking for affordability in 2023 will find that prices aren’t coming down, according to the Realtor.com 2023 Housing Forecast. With the housing market beginning a gradual adjustment that could last through 2025, what next year will offer buyers is less competition for a growing number of for-sale homes. 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,” said Danielle Hale, Chief Economist for Realtor.com. “With mortgage rates continuing to climb as the Fed navigates the economy to a “soft-ish” landing, higher costs will lead to fewer closings, but that doesn’t mean homebuying will stop entirely in 2023. Americans who are determined to make a move will find that staying up-to-date on the market, flexibility, creativity and a healthy dose of patience will go a long way toward success in the year ahead.” Some of the projections include:

• Average mortgage rates of 7.4%, with early 2023 hikes followed by a slight retreat to 7.1% by year-end.
• Home sales prices won’t come down, but growth will moderate to a single-digit yearly pace (+5.4%) for the first time since 2020.
• Rents (+6.3% year-over-year) will outpace home prices and likely hit new highs, further adding to budget pressures – especially for first-time buyers. Source: MReport

Zillow predicts that affordability will stabilize in 2023 from pandemic-era highs. Looking specifically at new construction, Zillow predicts that most new construction will be focused on rentals and further predicts that this should be accompanied by a jump in homeowners becoming first-time landlords. “Americans finding ways to make payments on a roof over their heads is going to drive the market next year. Where costs are lower, we’ll see healthier sales and inventory levels. If rent is less expensive than a new mortgage, we’ll see increased demand for rentals—something builders and landlords understand,” said Zillow Chief Economist Skylar Olsen. “Affordability is going to be the biggest factor in housing for 2023, but there’s room for optimism on that front if mortgage rates recede.” Zillow also addressed the new trend of buying homes with a friend or family member instead of a spouse. Eighteen percent of buyers purchased a home with someone other than a spouse in 2022, and that number is expected to go higher in 2023 as buyers turn to unconventional means to secure a home in today’s market. On the topic of affordability, Zillow said it will be the driving force pushing the housing market along in 2023, but there is a chance for it to stabilize—and just maybe — improve. “Zillow expects national home values to remain relatively flat next year, and even fall in the markets most challenged by affordability issues. Mortgage rates are seeing some recent and encouraging progress downward as inflation and labor market tightness show some small signs of easing. If we’ve actually turned the corner on inflation, that should continue,” Zillow said. “Rent growth should move closer to historical norms next year, as well. Annual growth came down quickly from a massive peak of 17.1% in February to 9.6% by October. Rents fell during the month of October, the first time in two years, signaling a return to regular seasonal patterns.” Source: DSNews

Sales of previously owned U.S. homes will fall for a second year in 2023 to their lowest annual total since 2012 when the housing market was still in a slow recovery from the sub-prime mortgage crisis, but sales prices should hold up, the National Association of Realtors said. Existing-home sales, which have fallen each month since January as mortgage rates surged on the back of the Federal Reserve’s aggressive campaign to hike interest rates to control inflation, are projected to slide by another 6.8% to 4.78 million in 2023, Lawrence Yun, NAR chief economist and senior vice president of research, indicated. Yun estimates the 2022 total will reach 5.13 million units, down by more than 16% from 2021’s 6.12 million. That year was the highest sales total since 2006, just ahead of the financial crisis. Prices will continue to be supported by supply constraints and should remain more or less flat, with the median transaction price estimated at $385,800 versus $384,500 this year, NAR said. “The demand for housing continues to outpace supply,” Yun said. There were 1.22 million existing homes for sale in October, roughly half of the average monthly inventory of 2.3 million units since 1982. Source: Reuters