To start with the Federal Reserve has indicated that the US economy will be struggling with slower growth, higher unemployment, and more inflationary pressure in the coming year. January will greet Americans with the same high inflation environment and high mortgage rate environment that’s been hampering us for the latter half of 2022.
With a modest listing inventory and a pullback in new home construction, limited housing supply will continue to headline the news in 2023. Despite economic headwinds, after a decade of underbuilding, there simply aren’t enough homes to meet demand. Home listings are down 29% from over the last five years according to data provided by Realtor.com. The National Association of Home Builders (NAHB) projects that single family starts for 2022 will decline 12% from 2021, with even bigger declines in 2023. In a recent survey by the National Association of Realtors (NAR), only 1% of realtors reported working with distressed sellers compared to 49% of realtors who were doing so in 2009. Indeed, John Hunt, principal at Atlanta-based MarketNsight, does not see a housing collapse like the nation experienced in 2009. “We think the housing shortage is going to get worse over the next year,” he said.
Thirty-year fixed mortgage rates rose from about 3% to around 7%, at its peak, in 2022. Ultra-low interest rates over the past few years are causing existing homeowners to stay put. For those that do move, expect to see an increase in applicants that opt for adjustable-rate mortgages which accounted for 12% of total applications in November 2022, up from 3.3% the previous November. Otherwise, sticker shock waits for those who purchase a home and finance a mortgage at today’s thirty-year fixed rate. When coupled with rising costs for food, gas, and other necessities, it makes sense that people are reluctant to move.
Homeowners continue to enjoy very high levels of home equity which helps to prevent a deep housing recession. Homeowner equity provides a cushion against accelerated price depreciation in a slowing economy. For those feeling the pinch, tapping into homeowner equity could bridge the gap through an economic downturn. Other homeowners may choose to sell their homes in lieu of taking on additional debt. Either way, a glut of foreclosures, which would put downward pressure on prices, is not expected. The consensus is that home prices will remain steady or could dip about 5% in some of nation’s hotter markets like Austin, Phoenix and San Francisco. This is not to say that home builders are not incentivizing their product to sell it. The NAHB reports that 62% of builders are using incentives to attract buyers.
Still, there’s signs on the horizon that inflation could be in the initial stages of subsiding. Falling commodity prices, a weakening housing market, and a slowdown in manufacturing point to disinflationary forces already at work. Given the existing housing deficit of 1.5 million units, and broad consensus that mortgage rates will stabilize or fall within the next year, experts are bullish that 2024 could signal a nice recovery for the housing market. While the Federal Reserve can manipulate interest rates, the housing supply solutions are largely in the hands of local policymakers who control zoning and thus the amount of new home starts that can happen in a community.