Conflicting information pertaining to home prices and mortgage rates is clouding good decision making when it comes to purchasing a home.
- Should you buy or wait?
- When will rates go down?
- Is a decline in home prices inevitable?
In the paragraphs to follow I will give you some data supported insights from top economic advisors, infuse my 28 years of experience in the housing industry and pull out my crystal ball. Here goes.
If economic indicators keep moving as they have in the last 45 days, we are likely to see a break in interest rates in the first half of 2023; an improvement from previous forecasts pushing rate dips to late in the year. Two key factors could drive rates back down; impending recession and a cooling of inflation. To follow is a breakdown of these components with expert insights and even some optimism for the 2023 housing market and beyond.
What Drives Interest Rates
A proven method to guess where mortgage rates are headed is to follow inflation numbers, specifically Core CPI data as that is a primary indicator the Fed monitors in setting monetary policy . Core CPI is the Consumer price index 12 month look back minus food and energy prices. Food and energy prices are highly volatile and can’t be directly impacted by our national monetary policy and therefore are removed. Shelter accounts for approximately 39% of Core CPI. With home price increases reaching 40% in some areas and rents hiking 5% to 19% YoY our tight housing supply aggravated an already stressed supply chain and factored heavily in the spike in CPI that began in early 2021.
During inflationary times, demand is outstripping supply. Basic economics dictates prices for goods and services will elevate as a result. Core CPI heading into the pandemic was steady and within the Fed’s desired range of 2%-2.5%. Enter the pandemic and we see the vertical bar gray representing a recession comprised in large part by high unemployment levels paired with a brief drop in CPI. Rates followed.
In stepped the Fed with quantitative easing (QE) artificially keeping rates low to ensure market activity, but the Fed’s QE policy could not impact supply chain, only the cost of doing business. Looking at the chart below, CPI rapidly rose starting in second quarter of 2021, but 30-year fixed mortgage rates didn’t climb until QE was removed in December. As soon as the Fed discontinued the purchase of mortgage backed securities referred to as QE, rates followed the inflation brewing in the strained economy.
Rate Forecast
CPI is a 12-month measure that currently includes the bulk of the housing spike we experienced during the Fed’s quantitative easing term which held mortgage rates artificially low. Rolling into 2023, those exponential growth numbers will begin to drop out of the 12-month look back window and inflation based on Core CPI will shift and begin trending down.
An optimistic forecast by housing industry expert Barry Habib builds a case for mortgage rates back near 5% in the first half of 2023.
Recession Inevitable
Fed rate hikes lead to recession. Increasing the Federal funds rate directly impacts the cost of doing business, driving the need to cut costs, resulting in layoffs. Recessions have historically been accurately foreshadowed by a rising unemployment rate. Still low at 3.5%, unemployment numbers have just begun to inch upward as the cost of business gets more expensive. Mortgage rates have without fail declined during recessionary periods lending additional support to a first half mortgage rate drop. Consumer confidence in the form of spending habits will be a key contributor to exactly what our recession looks like.
Recession does not equate to a housing crash. We are missing two key factors that drove the housing crash of 2008, excess housing supply and a high risk for credit defaults. Both are at historic lows. While it is positive news homeowners are in strong equity positions with healthy credit, the housing supply picture has bounced from one extreme to the other.
Current housing supply including existing and new homes available is 1.25M versus the 4M of 2008. Ideal supply should hover between 2M and 2.5M for steady growth and a healthy housing market. Clearly excess supply is not an issue.
New housing starts quiet heading into a recession as builder confidence wavers which doesn’t bode well for new home starts picking up in time to support an uptick in demand next Spring and Summer.
Buyers…Incoming!
The chart below recaps housing supply data back to 1984 and highlights the exceptionally low current level as we brace for our largest wave of home buyers. The average age of a first-time home buyer is 34 to 35 years old. Current census data estimates roughly 50 million new buyers will flood the market over the next 10 years. Clearly not a forecast that incorporates a housing crash.
Housing Price Forecast
Home prices have steadied but not declined in our local market and are predicted to close the year nationally with an 11.4% YoY gain. Forecasts for 2023 quiet to a national average of 3.2% YoY growth, more closely aligned with the 60-year average of 4.9% annual growth. Moody’s experts anticipate a nationwide price correction of roughly 7.5% coming primarily from those markets that saw spikes upward of 40% during the housing peak.
If you are looking upsize, downsize or are a first-time buyer, this is a buyer’s window. My advice:
- Get pre-approved and start shopping now. Time on the market locally is hovering around 19 days and prices have re-aligned with reality. December to April are the slower months with activity picking up in late Spring. Spring is likely to coincide with any forecasted rate declines adding to the buyer demand that will be competing for a limited supply of homes.
- Exercise a temporary rate buy down and drop your interest rate 2% below the note rate. 2/1 temporary buy downs drop the interest rate for the first 2 years of the loan and are typically funded as a seller concession. A rate buydown will cost a seller less than a meaningful price reduction and have been very well received at the negotiating table with many of my buyers and sellers. Here’s a financial example of a 2/1 Temporary Rate Buy Down
- Go for the long-term benefit. Buy now, refinance in 6 to 12 months if rates do in fact move as predicted. Avoid the Spring rush compounded by diminishing supply. Home prices will only head up as rates go down and supply tightens. Rates are temporary, homes are the long-term play.
What Could Go Wrong
The following chart sums up what could go wrong from an economist’s perspective adding probability and weight to each factor. All crystal balls, including my own can only predict with known data. I’ve recapped current trends, measured them against history and “forecasted”. The chart highlights that predictions are just that, a guess, an estimate – a prediction.
Nerd Out at Your Holiday Party
I’ve skimmed the surface here hoping to offer guidance if you’re seeking to purchase or sell. At minimum, you have expertise to take to your holiday parties should you hear the term housing bubble or crash in passing conversation.
Knowledge is far more powerful than timing.
by Sheila Landis for The Landis Group
