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Happy New Year, 2023! What’s the Housing Market Like? Is It Too Late to Buy?

John Russell Jan. 12, 2023

What a difference a year makes.

A year ago, the real estate market still seemed hot. 2021 had seen mortgage interest rates hit an almost unheard-of annual average low of 2.96 percent. The supply side problems of the pandemic made new construction materials hard to obtain, and therefore much more expensive. Home buyers turned to existing homes. But there was a shortage of the “inventory” of pre-built homes, driving up demand, prices, and prompting buyers to try to snap up homes as soon as they were listed for sale. Bidding wars erupted. Selling for more than the list price was the norm.

As 2022 began, we started to feel the effect of an economic downturn. Inflation had returned to haunt us in a way it hadn’t since the 1970s. Consumer prices started to rise. The lingering supply side issues from the pandemic made it tough to find what we needed. Demand drove up the price; inflation brought it up even more. From gas to groceries to garages, 2022 prices seemed out of control. The core inflation rate rose nearly 9 percent from January to December – 5.1 percent in September alone. The Federal Reserve felt compelled to raise interest rates seven times over the course of 2022.

What About the Housing Market?

The housing “inventory shortage” became less of a problem. As the number of existing homes increased by over 26 percent, buyers had more choice, and therefore, more negotiating power. Houses were spending more time on the market. By October 2022, the average time a home spent on the market was 54 days, when just a few months before, it was 7 days.

This change in supply and demand also affected prices. By mid-2022, the median listing price for a home was $450,000.00 – an all-time record high. July 2022’s home-price growth over the same time in 2021 was an amazing 15.6 percent. In just a month’s time, the median price had dropped to $435,000.00. By the end of November, it had fallen to $370,700.00. While this still reflected an increase of 5 percent over 2021, homes seemed to be losing value at a rate of 2 percent or more per month. (Although these prices were still 30 percent ahead of January 2019).

Great News for Buyers, but What About the Mortgage Rates?

The mortgage rates were at 3.25 percent as 2022 began. Inflation and the Federal Reserve’s decisions to raise general interest rates drove mortgage rates upward at a dizzying pace. By April, the thirty-year fixed mortgage rate was over 7 percent for the first time since 2002. While rates retreated briefly, by the end of the year, they were at 6.75 percent to 8 percent depending on the property’s location.

This meant that even if home prices were coming down, soaring mortgage rates served to cramp affordability. For example, a $200,000.00 house purchased in February 2022, with a mortgage of $195,000 and an interest rate of 3.8 percent resulted in a monthly payment of principal and interest of $903.00 a month. The same home at the same price and same loan purchased in December 2022 with an interest rate of 7 percent results in a monthly payment of $1,297.00. The same investment now costs 30 percent more.

This combination of elevated mortgage rates and housing prices (which, despite the recent decline, are still 30 to 50 percent higher than they have been in decades) means substantially reduced affordability. We’ve seen new construction sales decline by 18 percent. Existing home sales are down 23.8 percent.

As 2023 dawns, the news about the real estate market seems to be all bad – especially for Buyers.

But home prices and mortgage rates aren’t the only things to consider. The cost of renting is also at an all-time high. With overall inflation currently around 8 or 9 percent, a homeowner can take on a fixed rate mortgage to provide a hedge against inflation. With home prices starting to come down, the monthly cost of ownership will generally be lower than renting.

The increase in housing inventory also helps. More houses mean less pressure for a buyer to make a particular home a “must have” – buyers have more leeway to shop around. Houses are spending more time on the market, allowing buyers to make more careful and informed decisions. Sellers are beginning to adjust their expectations.

There have also been indications that inflation is slowing, and mortgage rates may be coming back down to earth. People alive today may never see mortgage interest drop below 4 percent again, but the rates certainly won’t keep going up indefinitely. Some of my buyer-clients have taken the plunge, hoping that in a year or two a decline in interest rates will allow them to save money with a refinance.

Options to Help Facilitate a More Affordable Home Purchase

For example, the Federal Housing Finance Agency (FHFA) recently announced it raised the “conforming loan” limits. Mortgage loans that fit into conforming loan limits don’t have as many restrictions, expenses, or fees as non-conforming loans. With a “conforming loan,” you can arrange for a lower down payment, a lower mortgage rate, and get approved with a lower credit score. Plus, if the home you are seeking to purchase is in what the FHFA defines as a “high cost area,” you can buy a more expensive home and take advantage of the “conforming loan” benefits. (I plan to go more in-depth on the FHFA’s conforming-loan/high-cost-area advantages in a future blog entry).

Another option, if a buyer can afford it, is to finance over 15 years rather than 30. Let’s take that same $200,000.00 home purchase with a $5K down payment that results in a $1,297.00 monthly payment of principal and interest. 15-year rates are usually a point to a point and a half lower – for the sake of example, we’ll use 5.9 percent. The monthly payment is higher of course — $1,635.00 per month. But you’ll save 65 percent on interest for the life of the loan.

But where the 15-year concept will really come in handy is for those buyers who are taking the plunge now, with 30-year rates over 7 percent. While the monthly payment on the current 30-year fixed loan is 30 percent more than it was last year, if mortgage rates continue to moderate, those buyers can refinance in a few years after paying down their existing loan to a degree. Then, they can refinance at 15 years, at a lower rate and a significant savings on interest.

While home prices are seeing a sharp decline, economists are not forecasting a housing crash like 2008. In fact, in areas like Chicago’s south side and the southern suburbs, where housing price increases were more modest than the rest of the country, we may see the market stabilize a lot faster as the rate of inflation slows.

People will always be selling and buying homes. It will be tougher to do so in 2023 because of inflation and other factors. It won’t take long, however, for both buyers and sellers to adjust. Interest rates will eventually stabilize at rates that are higher than we’ve had the last few years, but with less volitivity. There will be a lot less of a “wild west” feeling in the market – no more bidding wars or paying more than list price. The pendulum will swing back – and a feeling of stability and satisfaction will return.

(As I review this material before publication, the current mortgage rates for January 9, 2023 are 7.09 percent for a 30-year fixed, 5.96 for a 15-year fixed).

In any event, no one should consider selling or buying real estate without getting an attorney involved. Here at John R. Russell, Ltd., we stand ready to assist you with the process of selling or buying. Feel free to contact us or