NEW REPORT PREDICTS LOWER-THAN-EXPECTED HOME SALES

Dated: July 3 2023

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New Report Predicts Lower-Than-Expected Home Sales

After turbulence in the banking sector and an overall shaky first half of 2023 characterized by high mortgage rates and low inventory, realtor.com® is significantly downgrading its forecasts for the housing market in 2023, predicting that sales will fall to the lowest level in over a decade.

High inflation and the Fed’s actions to curb it have had a significant impact on the housing market this year,” said realtor.com® Chief Economist Danielle Hale in a statement. “And while inflation has begun to ease, the sustained spike in mortgage rates was enough to stifle the housing market after several years of low rates and strong activity.”

Realtor.com® is now predicting 4.2 million existing-home sales, down from 4.5. That would translate to 800,000 fewer sales than 2022, or about a 17% decrease.

Communicating with RISMedia via email, Hale says this lower number is due to several factors.

A slower pace of early year sales, combined with lower inventory explains the modest drag on existing-home sales relative to the prior forecast,” she explains. “With many homeowners choosing to stay put and dwell in place, the number of options available for buyers is slimmer.”

Prices, which were initially estimated to grow by a modest 5.4%, are now expected to remain roughly flat—losing 0.6% over the course of the year. Existing home inventory, which realtor.com® initially saw as increasing significantly (by 22.8%) is now expected to fall by 5%.   

Updated predictions mid-year is a regular practice for realtor.com®, which released its initial 2023 projections last November. While most economists and experts were expecting this year’s market to trend well below pandemic years following the Fed’s aggressive interest rate hiking campaign, moderating mortgage rates and some positive early indicators offered hope that 2023 could feel more like a rebound than a slump.

But after a somewhat disappointing spring market and rates that have remained stubbornly high, the expectation is now for even larger drops in sales, price appreciation and inventory.

“The housing market has really seen a double whammy in 2023, with a retrenchment in the number of homes for sale coupled with still-high prices and mortgage rates that have kept both first-time and repeat buyers on the sidelines,” Hale said.

With existing sales down, homebuilders appear to be moving to fill the void as housing starts surge and builder confidence grows steadily. New homes make up only a fraction of the overall market, and housing experts have continued to express worry that existing homeowners will hang onto their low mortgage rates and freeze a significant portion of housing inventory off the market.

The updated mid-year projection described the phenomena of “mortgage rate lock-in” as a “major challenge” to the market this year. Hale tells RISMedia that getting homeowners to give up their rates and move could become an even larger issue years down the line.

(O)n a $400,000 fully amortizing 30-year fixed-rate loan, a homeowner with a 3% rate will have paid down nearly $16,600 more debt than a homeowner with a 6% mortgage rate,” she says. “This means that homeowners with the lower rate will have an extra $16,600 in equity to work with after five years, even if home prices don’t change one bit. Because these benefits accumulate over time, I expect we’ll see them play a bigger role over the next few years.”

The new expectation for mortgage rates was one of the few positive updates in the mid-year predictions. When realtor.com® first released the projections, rates were close to 7% and trending upward. The forecast was that they would stay this high, averaging 7.4% and ending the year at 7.1%.

Now, after the Fed skipped a rate hike for the first time in over a year, the expectation is for rates to be 1% lower than the initial projection—down from their current level of about 6.7% to end the year at 6.1%. That is still much higher than the National Association of REALTORS®’ (NAR) initial projection from last year, which had rates sinking toward about 5.7% by the end of 2023.

Hale says that today, there are other factors besides the Fed’s rate hike decisions that will be “more influential” on mortgage rates—mainly, the path of inflation. With expectations for two more rate hikes this year and “considerable progress” on taming inflation, Hale says she expects “some near term pressure” on mortgage rates, but a better long-term outcome based on current policy.

One other positive (at least for most people) is a decrease in rents. With rental costs falling much faster than home buying, realtor.com® is predicting a small overall decrease in rents, after 2022 saw a 10.9% increase.

ORIGINAL POST: RISMEDIA

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