Housing Market Predictions: When Will Homes Be Affordable Again 2023?
“As the weather begins to cool, the housing market is also showing signs of slowing down. The combination of skyrocketing mortgage rates and soaring home prices has made it increasingly challenging for potential homebuyers to enter the market.
In mid-August, the national average for a 30-year fixed mortgage rate surged past the 7% mark, reaching its highest point in 2023 at 7.23%. As of September 14, the average rate stands at 7.18%, as reported by Freddie Mac.
Meanwhile, existing monthly home sales experienced a year-over-year decline in July for the second consecutive month, dropping by 2.2% to a six-month low. The decline in sales was observed across all four major U.S. regions, according to the National Association of Realtors (NAR).
Despite the exceptionally high mortgage rates and home prices, the market remains fiercely competitive due to ongoing inventory shortages and homeowners with low-interest rate mortgages choosing not to move. These factors contribute to the persisting affordability crisis that continues to impact aspiring homeowners.
The overall activity in the housing market remains subdued, primarily due to the trifecta of challenges posed by high mortgage rates, elevated home prices, and limited housing inventory. Additionally, concerns about high inflation and the possibility of further interest rate hikes loom on the horizon.
Mortgage rates began to rise in mid-July and have continued on an upward trajectory. The average 30-year fixed-rate mortgage reached a peak of 7.23% during the week of August 24, marking the highest rate since March 2022. These rate increases followed the Federal Reserve’s decision to raise the federal funds rate by 25 basis points at its July meeting, which marked the 11th rate hike since the Fed initiated its battle against inflation in March 2022. A basis point represents one-hundredth of one percentage point.
The federal funds rate is the rate at which financial institutions lend to each other overnight. The rate was near zero in March 2022 but has since increased to a range of 5.25% to 5.5%, with indications from the Fed that more hikes may be in store.
Federal Chair Jerome Powell emphasized the Fed’s commitment to further rate increases, stating at the Federal Reserve’s annual Jackson Hole summit, ‘We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective. Two percent is and will remain our inflation target.’
Will the Fed Raise Rates Again?
The focus is currently on the Federal Reserve’s September 19-20 meeting, during which committee members will review the latest economic data to determine their stance on monetary policy and whether they will maintain or raise rates.
Keith Gumbinger, Vice President at mortgage website HSH.com, notes, ‘Right now, it’s more about what the Fed intends to do rather than what it does. Another quarter-point hike at this point won’t significantly alter the big picture, as much of the impact from higher interest rates has already occurred or is underway.’
Gumbinger emphasizes that what matters most is the Fed’s communication regarding how long they plan to keep rates elevated and when rate reductions might be anticipated.
When Will the Housing Market Recover?
For a housing recovery to take place, several conditions must align. Gumbinger explains, ‘For the best possible outcome, we’d first need to see an increase in the inventory of homes for sale. This additional inventory could alleviate the upward pressure on home prices, potentially stabilizing or even reducing them from their peak levels.’
Additionally, interest rates would need to moderate. However, Gumbinger suggests that a rapid decrease in rates could trigger a surge in demand, negating any gains in inventory and causing home prices to rebound.
Gumbinger believes that a return to more ‘normal’ mortgage rates in the upper 4% to lower 5% range would aid in the housing market’s recovery, but achieving those rates may take some time.
Despite 30-year fixed mortgage rates surpassing 7%, mortgage originations showed an uptick in the second quarter of 2023, reaching $393 billion compared to $344 billion in the first quarter, which was the lowest total since the second quarter of 2014.
Housing experts, however, anticipate that originations will remain subdued for the rest of 2023. Existing-home sales have declined significantly year-over-year, with a notable 16.6% drop from July 2022, according to NAR. Except for a minor increase in April, year-over-year home sales have been on a downward trend since February of this year. Pending home sales, considered a leading indicator for existing-home sales, only saw a modest increase of 0.9%.
Lawrence Yun, Chief Economist at NAR, acknowledges the challenges but sees hope on the horizon. ‘Home sales are essentially bottoming out this year, with an anticipated upturn expected next year,’ Yun said during the trade organization’s real estate forecast summit. ‘However, this is contingent on mortgage rates falling.’
Yun predicts that mortgage rates will fall to around 6% by the end of 2023 as the mortgage spread, the gap between the 10-year Treasury bond yield and the 30-year fixed-rate mortgage, normalizes. Currently, the spread is around 300 basis points, well above the historical range of 150 to 200 basis points.”