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What the 2023 housing market will be like: When will home prices get good again?

As the weather starts to get cooler, the housing market continues to crash. Many people who want to buy a home can’t handle the unbelievably high mortgage rates and home prices.

In mid-August, the national average 30-year fixed mortgage rate shot through 7% and hit a high point of 7.23% in 2023. FRED Mac says that the average rate for a 30-year fixed mortgage as of September 21 is 7.19 percent.

Also, the National Association of Realtors (NAR) reports that year-over-year existing home sales fell for the second month in a row in July, falling 2.2% to a six-month low. Sales fell in all four major U.S. areas.

Even though mortgage rates and home prices are very high, the market is still very competitive. This is because demand is higher than supply, and renters who locked in low interest rates are staying put. These and other reasons keep up the perfect storm of high prices that keeps many people who want to buy a home from doing so.

What the housing market will be like in September 2023

Overall, the housing market is still not very active because of high mortgage rates, high home prices, and a lack of available homes. These three problems are making it harder for people to afford to buy homes. Still, there is a chance of more interest rate hikes and really high prices.

At its meeting in September, the Federal Reserve decided not to raise the federal funds rate. Instead, it chose to keep it in the same range, which is currently between 5.25% and 5.5%. The federal funds rate is the interest rate that banks charge each other to give money overnight. Fed rate hikes have an effect on long-term home loans like 30-year fixed-rate mortgages in a roundabout way.

The Federal Reserve thinks that the final federal funds rate will hit 5.6% by the end of 2023. This means that rates will likely go up at least one more time this year. Because of this, a lot of experts think that mortgage rates will stay well above 6% for the rest of the year.

Mortgage rates shot up in the middle of July and haven’t looked back since. The average 30-year fixed rate hit a high point of 7.23% the week of August 24. This is the highest rate since March 2022. It comes after officials at the Federal Reserve voted to raise the federal funds rate by 25 basis points at the July meeting. This is the 11th rate increase since the Fed started fighting inflation in March 2022. One hundredth of a percentage point is equal to one basis point.

What effect will the Fed’s choice of interest rates have on mortgage rates?

Mike Gumbinger, vice president of the housing website HSH.com, says, “Right now, it’s more about what the Fed plans to do than what it does.” “[A]nother quarter-point hike won’t make a big difference right now, but it won’t hurt either. A lot of the “damage” from higher interest rates has already happened or is already happening.”

Gumbinger also says that the most important thing is what officials say about how long they plan to keep rates high and when they plan to lower rates.

Gumbinger says that a housing rebound can’t happen until a number of things happen.

When will the real estate market get better?

“In order for things to go as smoothly as possible, we’d need to see a lot more homes for sale,” says Gumbinger. “In turn, this extra supply would lessen the upward pressure on home prices, bringing them level or maybe even helping them settle back a bit from peak or near-peak levels.”

Of course, loan rates would have to go down.

Gumbinger says you shouldn’t hope they cool down too fast. If rates drop quickly, there could be a rush of buyers that wipes out any gains in availability, sending home prices back up.

According to Gumbinger, it’s better for rate cuts to happen slowly over time, making it easier for buyers over time, rather than all at once.

Getting mortgage rates back to a more “normal” range of upper 4% to lower 5% would also help the home market get back to where it was from 2014 to 2019.

Gumbinger thinks it might be a while before we get back to those rates, though.

Where Are Mortgage Originations Right Now?

A 5% mortgage rate seems like a far-off dream since the average 30-year fixed mortgage rate is well above 7%.

Even though rates were high, mortgage originations went up to $393 billion in the second quarter of 2023 from $344 billion in the first quarter, which was the lowest total since the second quarter of 2014.

Still, housing experts think that originations will stay low for the rest of 2023. The number of sales of existing homes dropped by a huge 16.6% from July 2022 to 2017. Except for a small rise in April, home sales year over year have been going down since February of this year. A sign of how current home sales are doing is that pending home sales only went up by 0.9%.

“The small rise in contract signings shows that there is room for more growth, since many people have missed out on multiple home-buying offers,” said Lawrence Yun, chief economist at NAR. “However, rising mortgage rates and a lack of available homes have temporarily made it harder for many people to buy.”

Still, Yun can see a light at the end of the tunnel.

“Home sales are pretty much bottoming out this year… before what we expect to be an upturn next year,” Yun said at the real estate forecast meeting of the trade group. “But this will only happen if mortgage rates go down.”

The mortgage spread today is about 300 basis points. This is the difference between the yield on a 10-year Treasury bond and the yield on a 30-year fixed-rate mortgage. Based on how things have been in the past, the difference should be 150 to 200 basis points. Yun thinks that mortgage rates will drop to about 6% by the end of 2023 so that the range can return to normal.

A Look at the Housing Inventory for September 2023

The availability of homes is still very low compared to the past, especially for first-time buyers. This is keeping demand high and keeping home prices high.

Still, new single-family homes have been somewhat saving the day by attracting eager buyers who are frustrated by the lack of used houses for sale. The price difference between the median sales price of a current home and the median sales price of a new home has also shrunk a lot in recent months, which is another reason why people want to buy a home.

New and Used Homes

The only good news was that there was some inventory on the resale market. This was likely because people were either leaving the market or moving on to new building.

For months, inventory has been stuck at all-time lows. After staying the same in June, the number of unsold existing homes rose by 3.7% between June and July. But at the current rate of sales, this only increases the stock from 3.1 months worth to 3.3 months worth. Many experts say that there should be four to six months’ worth of homes for sale in a healthy market.

At the same time, the seasonally corrected estimate of new homes for sale at the end of July was 437,000. This means that there were 7.3 months of supply at the current sales rate, which is less than the 10.9 months of supply there was a year ago.

Jack Macdowell, chief investment officer and co-founder at Palisades Group, says, “Inventory is about 46% below the historical average going back to 1999.” Macdowell says, “We don’t think it’s likely that the inventory problem will be fixed in 2023.”

New Houses

Even though mortgage rates stayed above 6.75% in July, the number of new homes sold rose 4.4%, from 684,000 in June to 714,000 in July (seasonally corrected).

The Mortgage Bankers Association says that the 35.5% year-over-year rise in July of new home buy mortgage applications is another sign that new homes are having a moment.

More and more of those applications to buy a new home are for FHA-insured loans. The National Association of Homebuilders (NAHB) says that in the second quarter of this year, the share of new home sales backed by FHA loans rose from 12.1% to 14%. Low- to moderate-income people and first-time home buyers like FHA loans because they require less of a down payment and a credit score.

According to an email from Robert Frick, corporate economist at Navy Federal Credit Union, “new home inventory is becoming competitive because existing home inventory is low.” This means that the prices of new houses are now competitive with existing homes.

Two types of homes sold for different amounts of money in October 2022: a new home sold for $496,800 and an older home sold for $378,800. This is a $18k difference. There is now only $30,000 between them.

The U.S. median price for a new home fell to a 2023 low of $417,200 in April. Since then, however, it has been going up due to strong demand. The top price for a new home went up to $436,700 in July, according to the U.S. Bureau of the Census and the U.S. The Housing and Urban Development (HUD) Department.

Sales of new homes are also through the roof, up 31.5% year over year. However, sales of old homes are still going down.

What We Know About 2023 Housing Starts

There were mixed messages in the construction world, which suggests that some home builders are wary because mortgage rates are going up and there are other problems in the business.

Building starts for single-family homes went up by 6.7% after going down in June. The number of requests for building permits went up 0.6% from the previous month, according to the HUD and the Census Bureau.

At the same time, trust among builders dropped sharply after rising for seven months.

The latest NAHB/Wells Fargo Housing Market Index (HMI), which measures how builders feel about the market, dropped from 56 to 50. A number of 50 or more means that more builders think things will be good for new building.

Since mortgage rates are now going up again, builders started to offer incentives to people looking for homes again in August. Twenty-five percent of builders offered price cuts, up from twenty-two percent in July. This was done by 3% more builders between July and August. They also offered benefits to get people to buy.

In a press release, NAHB chairman Alicia Huey said, “Rising mortgage rates and high construction costs caused by a lack of construction workers, buildable lots, and ongoing shortages of distribution transformers cooled builder sentiment in August.”

Tougher loan conditions because of the Fed’s rapid interest rate hikes to fight inflation are another headwind for builders. Experts think it will slow down the building of homes.

In an email, Bill Adams, chief economist at Comerica Bank, said, “Long-term interest rates that affect residential financing costs are rising again. This is slowing down the recovery of single-family construction.” It is being said that home builders are making new flats smaller in order to make them more affordable.

Struggles with affordability keep would-be home buyers from buying.

It’s normal to not want to buy a house right now.

You’re one of 82% of people who said they put their plans to buy a home on hold, even though they say their job and pay are stable or better than they were a year ago, according to the Fannie Mae Home Purchase Sentiment Index (HPSI).

A new Redfin report says that people looking to buy a home on a $3,000-a-month budget could only afford a $429,000 home today. This is because mortgage rates are going up and home prices are still high.

Most of the time, things are worst for first-time buyers who want to find a home at a lower price.

Realtor.com data shows that starter home prices are continuing to rise, making housing even more out of reach for people who already don’t have enough saved for a down payment or whose incomes can’t keep up with the higher monthly payments.

In Wichita, Kansas, for example, monthly mortgage payments have gone up by 271% since 2019. The same thing is happening in many parts of the country that used to be cheaper.

The new First-Time Homebuyer Affordability Index from NAR shows that it is getting harder for first-time buyers to afford to buy a home. The early number for the second quarter was 61.4, down from 67.4 in the first quarter. If the number is 100, it means that a family with a median income makes just enough to get a mortgage and buy a normal house.

To put it another way, the average first-time home buyer doesn’t make nearly enough money to buy a house.

Are home prices starting to go down?

In some areas, home prices are starting to drop, but the housing affordability crisis is likely to last because there aren’t many homes for sale, mortgage rates are still very high, and sales prices are getting close to the record-high median existing-home sales price of $413,800 set in June 2022.

According to NAR, the typical price of an existing home dropped from $410,200 in June to $406,700 in July. It was up 1.9% from a year ago.

A Redfin report says that first-time buyers who want to buy a starter home will need to make about $64,500 a year. That’s 13% more than a year ago. In June, the price of an average starter home reached a record high of $243,000.

A $256k home is affordable for people making $75k a year, but only 23% of the homes for sale in April were priced at that amount or less, according to a report from Realtor.com and the NAR Home Affordability & Supply Council.

Are home prices going to fall in 2023?

The latest S&P CoreLogic Case-Shiller Home Price Index shows that home prices stayed strong from April to June, even though mortgage rates slowly rose.

The U.S. National Home Price nonseasonally adjusted (NSA) measure showed no change from one year to the next and only small increases from one month to the next. This is the fifth month in a row that prices have gone up, which shows that problems with pricing in the housing market aren’t affecting prices.

Still, this number came before the time when the average 30-year fixed mortgage rate went up quickly and passed 7%. Still, that level might not end up being a possible tipping point.

In an email statement, Selma Hepp, chief economist at CoreLogic, said, “While home prices have remained strong in 2023, high mortgage rates make the situation more difficult for potential home buyers. This is a trend that will likely limit further price gains for the rest of the year.” “However, CoreLogic’s latest HPI forecast says that home prices will still pick up speed and reach a mid-single-digit growth rate by the end of the year.”

There were still big differences at the regional level, with the winners from last month still in the lead.

“The biggest jump in home prices is seen in areas that stayed relatively affordable during the pandemic and didn’t see as much household migration, like the Midwest and New England,” Hepp said.

Hepp also said that these markets are now beginning to catch up to the more expensive ones.

“The three best-performing cities in June were Chicago (+4.2%), Cleveland (+4.1%), and New York (+3.4%). These were the same three cities that came out on top in May,” said Craig J. Lazzara, managing director at S&P DJI, in the study. “The Midwest (+2.8%) is still the strongest region in the country, and this month the Northeast (+1.6%) is in second place.”

On the other hand, home prices kept going down in flu boomtowns along the West Coast. San Francisco (-9.7%) and Seattle (-8.8%) were the worst hit. Overall, the West (-5.9%) stayed the weakest area.

The chance of a housing market crash—a sudden drop in home prices that are too high to support because demand is falling—is still very low, even though prices are going down in some places. According to experts, homeowners today are in a much better financial position than those who bought homes after the 2008 financial crisis. This is because many borrowers have good equity in their homes.

An economist at Zillow named Nicole Bachaud says, “Homeowner equity is at the highest level it’s been in the last few decades.” This means that people who own their own homes are very valuable.

Will there be a lot of bank owned homes in 2023?

A new study from ATTOM, a property data provider, shows that the number of foreclosures is still going down month over month.

ATTOM says that the number of default filings in July was 9% less than in June but 5% more than the same month last year. That’s 4% more foreclosures than the month before and 9% more than a year ago.

“The slight drop in foreclosure filings we’re seeing is another sign that the housing market is getting better,” said ATTOM CEO Rob Barber. “Now that home prices have gone up again, homeowners have more financial resources, giving them more options to stay in their homes and avoid foreclosure.”

That being said, Barber wasn’t sure if the trend would continue because the home market and the economy are still hard to predict.

In July, the five states with the most finished foreclosures (also called “real estate owned properties” or “REOs”) were, in order, Illinois, Pennsylvania, California, Michigan, and Texas.

Even though the number of foreclosures has gone up year over year, experts still don’t think there will be a huge number of them in 2023. A study from ATTOM says that in the second quarter of 2023, 49% of mortgage-owned homes in the U.S. had a lot of equity. That is, the expected market values of all of those homes were at least twice as much as the estimated loan balances. This gave homeowners a safety net against foreclosure.

When is the best time for me to buy a house in 2023?

In any market, buying a house is a very personal choice. For most people, buying a home is the biggest purchase they will ever make, so it’s important to be financially stable before you start.

Based on your down payment, use a mortgage calculator to get an idea of how much your weekly payments will be. But experts say this is probably not the best way to buy a house if you want to guess what will happen next year.

When it comes to the housing market, Divounguy says, “it’s almost impossible to time.” “People who want to buy a home should wait until they find one that they like, that meets their family’s current and future needs, and that they can afford.”

Gumbinger agrees that it’s tough to tell people who want to buy a house to wait for better times.

“More often than not, it seems like home prices keep going up, which makes it harder to save for a down payment. There’s also no guarantee that things will be better tomorrow than they are today.”

Divounguy says it’s worth “getting on the housing ladder” to start building wealth and the value of your home.

How to Buy a House in the Present Market
Keep an open mind because you might find that the area where you want to buy a home is still out of your price range, even if prices go down.

“Moving to lower-priced housing markets is a good idea to think about if you really want a house and can work from home or switch jobs,” says Frick. “A lot of people in the US have already done that.”

Also, make sure you have everything you need ready ahead of time. Look over your finances, gather the papers you need, talk to several lenders, and improve your credit score. When you do find your dream home, you’ll be ready to move faster if the market is tight.

“In today’s very competitive market, only those who are well-prepared—who have their financing in order, a good idea of what they can afford, and who are constantly checking prices and listings—will be successful,” says Frick. Make sure you know how much your monthly payment, plus taxes, will be and if that fits into your budget.

In a tight housing market, getting to know a real estate agent in the area where you want to buy could also give you a big advantage.

Also Read: Rent Your Own Dream Homes: How the Process Works

How to Sell Your Home in the Current Market

Divounguy says, “Sellers should work with an agent to make sure they set the right price.”

It’s the homes that are priced right that get lots of offers, says Divounguy. Other homes sit on the market for a long time.

He also tells people who want to sell their homes to get them ready to sell as soon as possible.

“Time and time again, sellers tell us that they wish they had started getting their home ready for sale earlier,” says Divounguy. “Don’t forget about your online curb appeal either.”

Divounguy also tells buyers that they should list their homes with either a 3-D virtual tour or an interactive floor plan. He says that Zillow ads that use these virtual tools get 69% more page views and 80% more saves.

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