2023 Market Predictions
Below the image are summaries and snippets from 15+ of the largest names nationally in real estate, finance, and consulting. After reading through the articles, here are some overall findings…
Inventory - Everyone appears in agreement that transaction volume will go down in 2023.
Interest Rates - Most believe interest rates will slowly come down over the next two years - low to mid 6s for 2023 - aka not much different than today’s rates. A couple outliers see 7 to even 8.5% rates. Higher interest rates give buyers pause as to what exactly they want to do after seeing rates in the 3s not that long ago. 80% of current homeowners have a rate of 2% or better than current rates. Will they want to sell and give up their mortgage at 3.5% so they can buy a different home at 6.5%? That spread in interest rates is a big deal when it comes to monthly payment.
Home Prices - Experts don’t expect a huge drop in home prices for a few different reasons - better lending standards in last 10+ years has fewer owners in position where they have to sell, large population (Millennials) entering prime home buying age will keep demand up even with headwinds in the overall economy, and we are still undersupplied in housing when looking at historical numbers (builders aren’t sitting on a massive number of spec homes like 15 years ago).
Denver Specifics - Looking at Denver home prices specifically, it becomes pretty interesting when trying to dissect predictions. Across the board, home prices rapidly climbed the first few months of 2022 and have generally been dropping since. Houses started the year at $595K, topped out at $680K in April, and closed out December at $600K. Condos/townhomes/etc. started around $400K, sprung up to $440K, and settled in December right around $400K again. So “peak to trough” in 2022 alone, we are down roughly 10% across the different housing structure types.
Things to Think About - Homes still sold in October at 7% rates, but the homes weren’t flying off the shelves like they were in March and April. If interest rates hover around 6% as they are now and as many experts predict, will buyers simply adjust to a new normal of higher financing costs? Seller-paid interest rate buy downs are already becoming more popular. Will adjustable rate mortgages become in vogue? Will buyers “marry the house but date the rate” as many lenders say when it comes to locking in a home price now but refinancing in a few years when many predict rates will be lower?
My Thoughts - Long-term, I am bullish on metro Denver. I believe we live in a time when consumers desire experiences. Think of all the experiences open to Denver residents within a 90-minute drive. It’s an awesome place to live. How many other cities can compete? And now realize that our population (3 million) is 4 million below Houston, 6 million below Chicago, 10 million below Los Angeles. I think there might be more people that want to move to Denver in the coming years.
The Deal of a Lifetime - I once heard someone say that the deal of a lifetime crosses their desk every day. It’s their job to spot it. Even if the overall housing market suffers a “down year,” I believe opportunities exist for both buyers and sellers. Look at stocks as an example. The stock market had a bad 2022. The S&P 500 was down 19.4% last year. But if you bought into the S&P 500 energy index, you would be up 58% for the year. I keep a running list of what I believe to be moneymaking opportunities in the Denver housing market.
I believe research equals better decisions for both buyers and sellers. If you want to talk more, please reach out! I’d be happy to chat.
Chat with Matt. Make a Plan. Live Your Dream.
Matt Long - 303-524-2086 (call or text) - MattLong@kw.com
Mortgage Bankers Association (MBA) – Predict 8 consecutive quarters of falling interest rates. 6.2% in 1Q2023 to 4.4% in 4Q2024 (6.2% 5.6% 5.4% 5.2% 5.0% 4.7% 4.4% 4.4%) and stabilizing at 4.4% in 2025. They expect Housing Starts to drop just under 10% from 2022 before rebounding in 2024 and 2025. Total home sales will experience similar drop and rebound over the coming years. The Median Price of new and existing homes nationally will drop roughly 3% in 2023 before again rebounding in 2024 and 2025. Note, the MBA predicts 2025 prices for both new and existing homes to be just below the recent peak in 2nd and 3rd quarters of 2022.
National Association of Realtors (NAR) – Chief Economist Lawrence Yun predicts annual median home prices to increase 0.3% nationally after a 9.6% gain in 2022. The 10 “Markets to Watch” based on economic indicators are all in the South and show conditions to support 5%+ appreciation in 2023. The number of homes sold will drop 6.8%.
Morgan Stanley - The transcript of the interview lays down pretty solid reasoning for their forecast of 4% drop in home prices year over year and interest rates perhaps under 6% by 2024. “Now, the biggest pushback we get to this outlook when we talk to market participants is that we're too constructive. People think that home prices can fall further, they think that home prices can fall faster. And one of the reasons that tends to come up in these conversations is some anchoring to the great financial crisis. Home prices fell about 30% from peak to trough, but we think it's important to note that that took over five years to go from that peak to that trough. In this cycle home prices peaked in June 2022, so December of next year is only 18 months forward. The fastest home prices ever fell, or the furthest they ever fell over a 12 month period, 12.7% during the great financial crisis. And that took a lot of distress, forced sellers, defaults and foreclosures to get to that -12.7%. We think that without that distress, because of how robust lending standards have been, the down 4% is a lot more realistic for what we could be over the course of next year. Going further out the narrative that we'll hear pretty frequently is, well, home prices climbed 40% during the pandemic, they can reverse out the entirety of that 40%. And we think that that relies on kind of a faulty premise that in the absence of COVID, if we never had to deal with this pandemic for the past roughly three years, that home prices would have just been flat. If we had this conversation in 2019, we were talking about a lot of demand for shelter, we were talking about a lack of supply of shelter. Not clearly the imbalance that we saw in the aftermath of the pandemic, but those ingredients were still in place for home prices to climb. If we pull trend home price growth from 2015 to 2019, forward to the end of 2023, and compare that to where we expect home prices to be with the decrease that we're already forecasting, the gap between home prices and where that trend price growth implies they should have been, 9%. Till the end of 2024 that gap is only 5%. While home prices can certainly overcorrect to the other side of that trend line, we think that the lack of supply that we're talking about because of the lock in effect, we think that the lack of defaults and foreclosures because of how robust lending standards have been, we do think that that leaves home prices much more protected, doesn't allow for those very big year over year decreases. And we think peak to trough is a lot more control probably in the mid-teens in this cycle.”
HousingWire - “Home prices will fall, but don’t expect 2010…There will be two key differences between 2023 and 2010. First, mortgage lending standards have remained high after the last bubble. People can afford to pay their mortgages. Second, because homeowners are well qualified, they can ride out this correction. There won’t be forced home sales like we saw in the crisis.”
Realtor.com - Forecast 7.4% interest rate average for the year with slow decline to 7.1% at year end. 5.4% median home price appreciation. For the Denver metro area specifically, Realtor.com predicts 1.9% drop in transactions but a 4.2% appreciation in prices year over year. Some overall bullet points from the article: “The Search for Affordability Keeps Cross-Market Shopping Elevated. Cross-Market Interest Benefits Affordable Areas Flattening Home Prices Nationwide. Markets Tightest at Entry-Level, but Luxury Real Estate Weathers Higher Rates. Explore all Options to Get the Best Rate & Understand What it Means for You.” On that last point, the spread between a 30-year fixed and a 5/1 adjustable rate mortgage has averaged 1.15% over the last few months. While taking on an adjustable rate mortgage has its risks, it is an interesting topic to explore. A 1% drop in interest rates equates to a roughly 10% jump in purchasing power.
Corelogic - Predicts 2.8% drop in home prices from November 2022 to November 2023.
Zillow - 5 Bold Predictions for 2023 - 1. The Midwest to feature front and center. 2. Buying with friends and family will gain momentum. 3. Affordability crisis will stabilize, if not improve. 4. Surge in first-time landlords. 5. New construction strength will be in rentals.
National Bureau of Economic Research - Includes a number of heavy research (an example being measuring pings from cell phones in the middle of the night to determine where people relocated to during the pandemic) articles. One finding states about one-third of jobs in the U.S. can be done remotely. Hybrid work schedules are becoming the norm. “NYC employers seem to believe that the return to the office has been completed and that the new normal has employees spend about half the workweek working from home.”
Bankrate - A contributor article with quotes from different professors and economists from across the country. One source is Nadia Evangelou, senior economist and director of Real Estate Research at NAR who discusses 3 possible scenarios for interest rates. “In scenario #1, inflation continues to remain high, forcing the Fed to raise interest rates repeatedly. 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. 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.” All sources quoted believe transaction volume will be down. Differing opinions on prices from relatively level to dropping 5-10% nationally. Another article on the website states 5 reasons why the housing market is not about to crash - “Inventories are still very low. Builders didn’t build quickly enough to meet demand. Demographic trends are creating new buyers. Lending standards remain strict. Foreclosure activity is muted.”
Redfin - Expect interest rates to average 6.1% for the year with a downward trend to 5.8% to finish out the year. “Mortgage rates dipping from around 6.5% to 5.8% would save a homebuyer purchasing a $400,000 home about $150 on their monthly mortgage payment. To look at it another way, a homebuyer on a $2,500 monthly budget can afford a $383,750 home with a 6.5% rate; that same buyer could afford a $406,250 home with a 5.8% rate. Still, that’s much less affordable than a few years earlier. With a 3% rate, which was common in 2020 and 2021, that same buyer could afford a $517,000 home.”
JP Morgan Chase - This article from September 2022 puts Denver in a “Not Overvalued” category with prices expected to “Hold Steady” over the next 1-2 years based on their z-score algorithm. Note, the data is from 1Q2022. Home prices generally rose the first half of 2022 and have fallen since.
Goldman Sachs – Home prices will drop 5-10% from the peak. “While the drop in home prices may seem large, those declines are expected to only partly offset the jump in housing prices that happened after February 2020 (for example, U.S. house prices soared 42% and those in Canada jumped 52%, without inflation adjustment)…A slowdown in the housing market could be cushioned by a relative lack of available homes in the U.S., Canada and U.K., and by strong household finances. Our economists think it’s unlikely there will be a large wave of forced selling in the U.S. because a recession would probably be mild, the housing market is tight, mortgage quality is solid and a large proportion of the mortgages have a fixed rate.”
KPMG – A good article on the overall US economy and different sectors. “Housing affordability hit its lowest level since the mid-1980s in October; more than half of all first-time buyers were unable to afford a home by March; buying conditions have worsened since then. Speculative investors are pulling back. All-cash buyers who flip to rent are waiting for additional price cuts…We expect the S&P Core Logic Case-Shiller home price index to drop 20% on a fourth-quarter-to-fourth-quarter basis in 2023. That would mark the first national decline in the series since 2011 and push prices to December 2020 levels…Better underwriting standards and a smaller jump in unemployment is expected to keep foreclosures in check; the cushion in equity is substantial…Millennials are aging into their peak home buying years. That suggests that housing could quickly rebound once rates drop and values settle. A rebound in sales and construction before the end of 2023 is likely. Supply will depend heavily on how willing older owners will be to leave their homes.”
Fannie Mae – “Growth expected to resume after a mild downturn in 2023…With mortgage rates continuing to rise over the past month, (the 30-year fixed-rate mortgage was 7.08 percent according to the November 10 Freddie Mac survey) the full effects of rate increases on home sales have yet to be felt. Affordability measures are strained, which we expect will continue to limit home purchases by first-time homebuyers. However, perhaps the larger effect on total home sales is a growing "lock-in effect," which is the financial disincentive for existing homeowners with a fixed-rate mortgage that is well below current market rates to put their home on the market, move, and take on a new mortgage rate well above what they had previously. Our rather bearish outlook in 2023 for existing home sales – we are now projecting the lowest annual pace since 2008 – is in part driven by this dynamic. Based on our analysis of historical Fannie Mae loan book data of fixed-rate 30-year mortgages, more than 80 percent of existing borrowers have mortgages at least 200 basis points lower than current market rates as of October and more than 90 percent have mortgages at least 100 basis points lower. This is by far the largest share since at least 2000 (and likely the largest since the late 1970s)…Beyond a slower pace of sales, an implication of this lock-in effect is that first-time homebuyers may increasingly turn to new homes in coming years as even fewer existing homeowners put their homes on the market. Given this, homebuilders may focus more on comparatively modest product offerings as the number of move-up buyers is lower relative to past cycles.”
Freddie Mac – “Mortgage interest rates have increased at the fastest rate since the early 1980s. The U.S. weekly average 30-year fixed-rate mortgage was 6.94% in the week of October 20, 2022, up 3.85 percentage points from a year ago according to Freddie Mac’s Primary Mortgage Market Survey. In the history of the Primary Mortgage Market Survey, which stretches back to April 1971, mortgage rates have only increased faster in 1980 and 1981. However, in 1980 and 1981, rates averaged 16% and 18%, respectively. Just one year ago, rates were under 3%. This means that while mortgage rates are not as high as they were in the 80’s, they have more than doubled in the past year. Mortgage rates have never doubled in a year before.” Expect 30-year mortgage rates to fall modestly in 2023 from 6.8% in 4Q2022 to 6.2% in 4Q2023. “House prices increased by about 40% since 2020 (vs. cumulative inflation of 15%) but the spike in mortgage rates has caused a correction in house prices. We expect house prices to decline modestly, but the downside risks are elevated. As the labor market cools off, housing demand will remain weak in 2023, potentially resulting in declines in prices next year. However, home price forecast uncertainty is wide due to interest rate volatility and the potential of a recession on the horizon.”
National Association of Home Builders (NAHB) – Predict mortgage rate of 6.74% in 2023 and 5.91% in 2024. Total Housing Starts to drop 8.9% in 2023 (1.538M to 1.401M) and then grow 8.9% in 2024 (1.401M to 1.525M). Even with a drop, 2023 Housing Starts are higher than 2018 (1.247M), 2019 (1.291M), and 2020 (1.395M). The peak in recent years was 2021 with 1.605M Housing Starts nationally.
Chat with Matt. Make a Plan. Live Your Dream.
Matt Long - 303-524-2086 (call or text) - MattLong@kw.com