If you thought the U.S. housing market was "hot" in 2021, you might be surprised to learn that it's not quite as sizzling in 2023. The pandemic-driven housing boom has started to cool down, with rising mortgage rates and mismatched expectations between buyers and sellers. But what lies ahead for the housing market in the coming year? We spoke to six experts to get their predictions.
The Federal Reserve and Mortgage Rates
The Federal Reserve recently raised its key short-term interest rate by half a percentage point, signaling slower growth, higher unemployment, and higher inflation in 2023. However, this could result in lower long-term interest rates, including mortgage rates. Mike Fratantoni, the chief economist for the Mortgage Bankers Association, believes that the recent decline in mortgage rates is reflecting market expectations of being near the peak for short-term rates. He also suggests that the U.S. may be headed for a recession next year.
Innovations in Mortgage Finance
Janneke Ratcliffe, the vice president of the Housing Finance Policy Center at the Urban Institute, expects to see accelerated innovation in the housing finance industry. With players actively pushing the envelope, Ratcliffe predicts advancements in credit scoring alternatives, artificial intelligence, climate adaptation, manufactured housing, and more. She also anticipates an increase in the use of adjustable-rate mortgages, which have been deemed safe due to regulatory reforms.
Janneke Ratcliffe, vice president of the Housing Finance Policy Center at the Urban Institute.
No 'Foreclosure Tsunami'
According to Odeta Kushi, deputy chief economist for First American Financial Corp., foreclosures occur when homeowners face both the inability to pay and a lack of equity in their homes. However, with high levels of tappable home equity today, homeowners have a cushion to withstand potential price declines. Kushi believes that the current equity buffers will result in involuntary sales rather than foreclosures. While foreclosures may increase due to a slowing labor market and falling house prices, it is unlikely to be a tsunami.
Odeta Kushi, deputy chief economist for First American Financial Corp.
Housing Inventory Will Remain Low
The chronic lack of listing inventory has been a driving force behind the price gains during the pandemic-era housing boom and is expected to continue affecting prices in 2023. Jonathan Miller, a real estate appraiser for the monthly Douglas Elliman Real Estate report, believes that excess supply is not the story for the coming year. Even with modest listing inventory growth, price declines should be minimal. Redfin forecasts fewer home sales in 2023 compared to any year since 2011.
Jonathan Miller, real estate appraiser.
Declining Home Prices
While there won't be a wave of foreclosures, Taylor Marr, deputy chief economist for Redfin, predicts a decline in home prices. He expects the median U.S. home-sale price to drop by approximately 4% in 2023. Despite this decline, homes will still be less affordable than before the pandemic buying frenzy. Taking into account projected prices and mortgage rates, the typical homebuyer's monthly payment will be about 63% higher in 2023 than it was in 2019.
Taylor Marr, deputy chief economist at Redfin.
New Home Construction Outlook
According to the National Association of Home Builders, single-family housing starts are set to decline in 2022, signaling ongoing contraction in home building in 2023. However, Robert Dietz, the chief economist for the National Association of Home Builders, believes that single-family home building will lead a rebound in housing and the overall economy in 2024. He also expects multifamily construction volume to fall back in 2023, following a strong year in 2022.
Robert Dietz, chief economist for the National Association of Home Builders.
Building Conversions?
While there has been talk of commercial-to-residential conversions, Marc Norman, associate dean of the New York University School of Professional Studies' Schack Institute of Real Estate, believes that most buildings will remain in limbo. The shift in ownership, financing, and regulatory systems for conversions takes time, and long-term commercial leases and high financing costs hinder progress. While there may be some beginnings of conversions, widespread action is unlikely.
Marc Norman, associate dean of the NYU School of Professional Studies' Schack Institute of Real Estate.
To stay updated on housing and economy news, you can follow Swapna Venugopal Ramaswamy on Twitter and sign up for the Daily Money newsletter provided by USA TODAY.
Please note that the original article was written by Swapna Venugopal Ramaswamy for USA TODAY.
