The year 2022 made history in the real estate market in several ways. Unprecedented numbers were seen in home prices, number of sales, and rise in mortgage rates.
It’s early 2023, and we are in the midst of a significant market shift where home prices are declining month over month, and mortgage rates are still twice what they were in December of 2021.
Most people have more questions about the future of real estate than they’ve had in years, if not decades. Today, we will take a look back at what’s been happening in the market, and take an educated guess as to what the future holds.
The Housing Market Review
According to recent market reports from various sources, the median price of homes in the US is from $357,319 to $388,100 depending on which of the major sources of housing data you look at.
The Year Over Year change in median price is between 1.2% and 10.8% higher than a year ago. I’d take the 10.8% with a grain of salt as we can see that the Real Estate market is not exactly booming anymore, and it hasn’t been for months.
Year-over-year numbers start to lose relevance right about now though. The reason is, we can see the chart below representing the median price of homes over the past 5 years and one thing stands out: the peak of the market was around May 2022.
So from now to about June of 2023, we will continue to see year-over-year prices going up. That was the old market before it shifted in May of 2022.
The Housing Market Pivot Point
If we are going to look at statistics that matter now and moving forward, let’s look at what has happened to the market since the peak.
Again, depending on which source of data you access, the number will look a little different but they all concur on one thing: Prices are falling, those are the numbers based on data, not opinions.
According to one source, the median price at the peak was $432,877 and in December of 2022, seven months later, the median price was down to $388,100. That calculates to a 10.3% over seven months or 17.6% annualized median price decrease. That’s rather significant, especially considering that we are just starting to see the impact of higher mortgage rates and record inflation.
Inventory Numbers
The number of homes for sale increased from December 2021 to December 2022 by about 14%. This is an indication of slower demand due to factors such as higher interest rates, inflation and economic uncertainty.
The number of days on the market has also increased dramatically, further proof that the demand for homes is shrinking. In December of 2021 the number of days on the market across the US was 25. In December of 2022, that number was 44, that’s a 76% increase in the number of days on the market Year Over Year.
Newly Listed Homes decreased from December 2021 to December 2022 by 30.4%. This indicates that those that are currently homeowners feel locked in and not able to sell for a couple of reasons. The main reason is the significant increase in their mortgage rate when they buy a new home. Right now, most homeowners have refinanced their mortgage into the low 3s or maybe even high 2s. To go from a 3.25% rate on their current mortgage to a 6.5% on their new home is just not something people can wrap their minds around. So they are staying put.
Another reason homes are not coming on the market is that sellers are a bit concerned, of course. There is fear in their minds about the future of the market, their job, etc. When people are afraid or confused, they take no action. Similar to what is happening with homebuyers right now. Many are waiting by the sidelines to see what happens with rates, the economy, home prices, etc.
Mortgage Rates Are Slightly More Affordable
As of early January 2023, 30-year fixed rates are in the low 6 percent range. That is a little over a one percent drop from October 2022 when rates were at around 7.32% and hovered above 7% for about a month.
If we take an average price home based on the above number on the current median price of homes, let’s say a home of $360,000 with a 10% down payment. The drop in rates means that a home buyer would be saving $259 a month now compared to October of 2022 when rates peaked. This is great news for home buyers.
An Educated Guess at the Housing Market in the near Future
The facts as we see them are clear; the housing market has shifted and it is in a downslide. Considering the many factors impacting the economy right now, one thing is certain; the future is uncertain! Housing prices are projected to continue to fall at least for the remainder of 2023.
Housing supply is still short of demand in the grand scheme of things so there is unlikely to be a total collapse of the market as we saw in 2008, during the great recession. This is good news for home sellers and home buyers alike.
Right now, there is still strong buyer activity, albeit not as brisk as we have seen in the last few years. Home builders, whom we have not discussed at length here, are taking a cautious approach to building more. This means inventory will continue to remain low for a while.
At some point, pent-up demand will overcome the challenges of the recent rise in mortgage rates. In fact, if we put things in perspective, mortgage rates around 6.5% are actually very good. Homebuyers will need time to adjust to the new reality of what is considered a “normal rate environment”. Once that mind shift takes place, and the market is overall more conducive to buying a home again, activity will continue to increase, and the market will normalize.
For now, it seems like there is a “wait and see” sentiment in many areas of the country, but that will change, it always does at some point.
Data Sources: Redfin, Realtor.com and FRED