Here are expert opinions on the market. I disagree with all of them:
The year started out with signs showing that the Federal Reserve’s inflation-fighting tactic was effective in cooling down the hot pandemic housing market.
For the first time in 11 years, home prices dropped year-over-year in February as mortgage rates more than doubled following the Fed’s consecutive interest rate hikes, curbing affordability.
However, the median price of a home increased month-over-month for the second consecutive month in March. The median home price is projected to increase for a third month in a row in April to $393,300, which is 2% lower than the previous April’s median price of $401,700, according to data released in May by the National Association of Realtors (NAR).
One big factor behind the strengthening home prices and the decrease in sales volume — down 23% in April from a year ago — is the lack of housing inventory.
“Home sales are bouncing back and forth but remain above recent cyclical lows,” says NAR Chief Economist Lawrence Yun. “The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand.”
Where are home prices headed?
Generally speaking, high mortgage rates should prompt house prices to trend downward.
“Yet, housing supply remains so restricted, that any uptick in demand will put upward pressure on prices,” wrote First American Chief economist Mark Fleming in a blogpost. “This is the dynamic that played out in March, as the spring home-buying season ushered in more demand for homes, while insufficient supply prompted buyers to compete and bid up prices.”
No return to typical seasonality in the market
There will be a lot of uncertainty in the economy over the next few months and prospective home buyers are going to be more opportunistic, as opposed to following traditional seasonal market trends, says Bright MLS Chief Economist, Lisa Sturtevant.
“There will continue to be volatility in mortgage rates as we wait to see what the Fed will do at its upcoming meetings and as we watch economic data roll in over the summer,” says Sturtevant. “Prospective buyers are going to be watching rates closely, and many will try to make an offer on a home when they see rates dip. As a result, we should expect less seasonality this year than we had prior to the pandemic.”
More sellers returning to the market
While inventory will remain low this year, we should expect to see more sellers who had been on the sidelines list their home for sale this summer and into the fall, says Sturtevant.
Many existing homeowners have been “locked in” with super low mortgage rates, which has discouraged discretionary moves.
“However, some people have to move, and others will decide to move for a bigger or smaller home, or to change jobs or neighborhoods, despite rates remaining elevated,” says Sturtevant.
The uptick in new home construction has provided more opportunities for move-up buyers who may have been staying in place because they did not have anywhere to move to.
“One thing that could shut down new listings is if we see a sharp spike in mortgage rates to 8 or 9%, a situation that is still unlikely but not out of the realm of possibilities,” she says.
New home construction
Instability of regional banks is a concern for builder and land developer financing going forward, says Robert Dietz, chief economist for the National Association of Home Builders.
Lending conditions for builders have tightened, and the interest rate for development and construction loans is now well above 10%, which threatens housing supply.
Single-family spec home building loans had an effective rate of 13% in the first quarter of 2023 compared to 9% in the first quarter of 2018.
“Our expectation is that the rate of these loans will move lower as the Fed cuts the federal funds rate, but our forecast is that will not happen until later in 2024,” Dietz told USA TODAY. “As a result, land development would be suppressed, and we risk loaning low on lots during a home building rebound in 2024. Lot development can take three years in a typical market.”
“Never make forecasts, especially about the future,” ~ Sam Goldwyn
I’m with you Jim. All those predictions are built on sand.
I think the predictions are pretty good for locations like Vegas or Denver where theres enough land that new homes compete with existing.
San Diego is different because you have TJ to the south, the ocean to the west, mountains to the east, and Pendelton to the north + the land in between for the most part is built out.
This double constrains the market because all you can buy is existing.
Throw in trusts + boomers passing properties they paid pennies for in the 70s/80s/90s down to their kids and you have even less for sale which again pushes up the prices.
I hate saying “its different here” but as long as banks arent foreclosing “it’s different here”
I say just keep watching that listing curve as it start going exponential.
Give it some time, it’s not the stock market, real estate prices are sticky, San Diego isn’t special, even the weather is getting crappy.
Some think rates will climb much higher. “Continued inflation, overall higher interest rates, a potential recession and geopolitical tensions will force 30-year and 15-year mortgage rates up throughout 2023, and will bring the two rates closer together as short-term risks rise,” says Dennis Shirshikov of real estate website Awning.com. He foresees the 30-year and 15-year benchmark mortgage loans averaging 8.75 percent and 8.25 percent, respectively, across 2023.
Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, shares some of those sentiments. “By the end of 2023, financial market participants expect that the Fed will have increased the target Fed funds rate by 175 to 200 basis points from current levels,” Johnson says. “That would translate into 30-year and 15-year mortgage rates at roughly 8.50 and 7.70 percent.”
Some experts are more hopeful, though. Rick Sharga, founder and CEO of real estate consulting firm CJ Patrick Company, expects rates to peak at about 8 percent and 7.25 percent for 30-year and 15-year loans in early 2023, “then gradually come down over the course of the year somewhat, to hang in the range of 6.0 percent and 5.25 percent, respectively,” he says. Sharga does specify one caveat: “This is entirely dependent on the Federal Reserve’s ability to get inflation under control and ease up on its aggressive rate increases.”
Three possible scenarios
Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors (NAR), lays out three potential rate scenarios for 2023, depending on the Fed’s moves going forward:
“In scenario 1, inflation continues to remain high, forcing the Fed to raise interest rates repeatedly,” she says. “That means mortgage rates will keep climbing, possibly near 8.5 percent.”
“In scenario 2, the Consumer Price Index responds more to the Fed’s rate hikes, and there is a gradual deceleration of inflation, causing mortgage rates to stabilize near 7 percent to 7.5 percent for 2023.”
“Or, in scenario 3, the Fed raises rates repeatedly to curb inflation and the economy falls into a recession. This could cause rates to likely drop to 5 percent,” she says.
Will housing sales decline?
Each of Evangelou’s three scenarios would have a major impact on home sales. In each case, sales will be down — it’s just a question of how much. “Higher rates under scenario 1 could cause home sales to drop by more than 10 percent next year,” she says. “In scenario 2, home sales drop by 7 percent to 8 percent. And in the third, home activity may drop further, by more than 15 percent.”
Sharga agrees that the slowdown in home sales that beset the second half of 2022 will continue into 2023. In addition, he says, listings will sit on the market for a longer time before selling. “Days on the market have been climbing back toward more normal levels recently, and we could see them approach 30 days or more in 2023 as the market continues to cool down,” he says.
The national average days on market as of April was 22, according to NAR data, which was an improvement over the previous two months but an increase from this time last year, which was just 17 days. “The average days on the market will increase somewhere between two and three times the current levels,” Shirshikov predicts.
Will home prices go down?
Will homes continue to remain financially out of reach for many purchasers next year? Experts say hopeful buyers should not expect today’s high prices to plummet anytime soon. “Home prices won’t drop in 2023,” Evangelou says. “I expect pricing to be relatively flat.”
Prices will remain fairly steady — and in a lot of markets, that’s a price that is 40 percent or more higher than pre-pandemic.
“If inflation pressures ease and we see a meaningful pullback in mortgage rates, this will ease some of the strain on buyers — but only a bit,” McBride says.
“Overall home affordability won’t change dramatically,” Johnson agrees.
“Home prices will not fall proportionally,” Shirshikov says. “Any fall in prices will not be enough to offset the rising interest rate and its contribution to the monthly [mortgage] payment.”
Even slightly lower prices would still be welcome news for house-hunters, though. “There are plenty of potential buyers still patiently waiting to enter the market,” says Scott Krinsky, a partner in the residential banking department with Manhattan law firm Romer Debbas. “Assuming home prices ease, you’ll start to see some of these buyers emerge.”
Will housing inventory increase?
A shortage of available homes helped fuel the frenzied market of the last few years. But experts differ on housing inventory projections for 2023.
“Before the housing crash of 2008, inventory peaked at about a 13-month supply — twice what we would see in a healthy market,” Sharga says. “Today, we have about a three-month supply, which is about half of what we need. Current homeowners are unlikely to trade in their 3 percent mortgage for a new home with a 7 percent loan unless they absolutely have to, so existing home inventory should remain low. And we are not likely to see a huge boost in supply from new construction anytime soon, either.”
Others foresee increased supply, at least slightly. “Many reluctant sellers — those waiting for the market to turn around — will likely capitulate [this year], adding to more housing supply,” Johnson says.
“Housing inventory will rise throughout 2023 as homes become more unaffordable due to high rates,” adds Shirshikov.
Will 2023 be a buyer’s market or a seller’s market?
For around two years, it was a clear seller’s market. But lately, buyers have been gaining back some leverage in many markets. So will the rest of 2023 favor buyers or sellers more?
“Affordability issues and economic worries will depress home buyer demand, and inventory of homes available for sale will remain limited,” says McBride. “So it’ll continue to be more of a balanced market than tilting one way or the other.”
Krinsky expects leverage to vary nationally, depending on the type of market. “With the pandemic, we saw a new spike of bidding wars in suburban and smaller markets, likely because of the desire for more space and the increased flexibility of remote working across the country,” he says. “Now that many offices and businesses are back near full capacity, the hope is that larger markets can revert back toward pre-pandemic levels and we will see increased demand there.”
Bottom line on the 2023 housing market
Most experts are in consensus that, in the big picture, 2023 will be something of a transitional year, characterized by uncertainty.
“The housing market will be tepid in 2023, with only lukewarm demand and a limited amount of inventory available for sale,” McBride predicts. However, “mortgage rates could pull back meaningfully if inflation pressures ease.”
“The hope is that, as supply and demand within the housing market normalizes, interest rates can start to come back down to earth,” Krinsky says. “Until this happens, those who simply cannot afford the costs of borrowed money will have to continue to wait.”
But if mortgage rates don’t move much, “borrowers will pursue fewer purchase loans and we will see a continuing decline in rate-based refinance activity,” Sharga points out. “With more homeowners staying in place, we also might see an uptick in home equity loans and home equity lines of credit over the course of the year.” If moving is out in 2023, remodeling may well be in.
Psycho-babble:
https://twitter.com/TDANetwork/status/1665800889389535232
San Diego isn’t special, even the weather is getting crappy.
If you live here, doesn’t everywhere else look crappier? The weather might be crappy for now, but is it so much better anywhere else that it would cause you to move there?
There are a fair amount of pilots who live in San Diego County. The old ones say it every time, “I’ve been everywhere in the world, and there’s no place better than San Diego”.
The reason “seasonality” hasn’t returned is because you need inventory sufficient to meet seasonal demand.
I can see that and buyers will still be interested later in the year. Will they still be on the edge of their seat and enthusiastically running out to see the few new listings? Or be exhausted by the frustration and busy with life/school stuff? I think it will be less of a priority, and it’s a fine line between an occasional sale and nothing.
“I think the predictions are pretty good for locations like Vegas or Denver where theres enough land that new homes compete with existing.
San Diego is different because you have TJ to the south, the ocean to the west, mountains to the east, and Pendelton to the north + the land in between for the most part is built out.”
Vegas is actually geographically boxed in and has capacity issues and Denver is looking at land use legislation to go high density due to capacity issues. And re Denver at some point on the concentric circle you’re not really in Denver anymore.
San Diego wasn’t immune in ’90-’95 or in ’07-’12 but maybe this time it really will be different here, of course we will only be able to confirm in the rear-view mirror.
On a related note as Jim has mentioned here we are seeing some area schools with reduced enrollment and at ECC elementary it’s looking like 1 kindergarten class when the school was designed for 4-5 classes. I think overall enrollment at that school is down about 40% from capacity. Unfortunately one result is fantastic teachers are being let go because there are not enough kids.