If you thought the U.S. housing market was hot in 2021, think again. The market has cooled down considerably this year, moving from a blazing hot streak to a more lukewarm state. The pandemic-induced boom that saw home prices soar by 40% over two years has started to slow down. Rising mortgage rates and a growing disconnect between buyers and sellers have been contributing factors to this shift.
But what does the future hold for the housing market in 2023? We reached out to six experts for their predictions, and here's what they had to say:
The Federal Reserve and Mortgage Rates
According to Mike Fratantoni, chief economist for the Mortgage Bankers Association, the recent decline in mortgage rates is a positive sign for the housing market. He believes that the housing market has already reached its peak for short-term rates and predicts a recession in the near future. The declining rates could provide some relief to buyers, but it may not be enough to offset the still-high asking prices.
Innovations in Mortgage Finance
Janneke Ratcliffe, vice president of the Housing Finance Policy Center at the Urban Institute, anticipates an acceleration in innovation within the housing finance industry. Lenders, startups, advocates, researchers, and policymakers are actively exploring new possibilities in mortgage finance. Ratcliffe highlights alternative credit scoring, artificial intelligence, climate adaptation, and manufactured housing as areas of focus. She also expects to see a rise in the use of adjustable-rate mortgages.
No 'Foreclosure Tsunami'
According to Odeta Kushi, deputy chief economist for First American Financial Corp., foreclosures are unlikely to be a major concern in the coming years. She explains that homeowners today have high levels of tappable home equity, which acts as a cushion against potential price declines and prevents foreclosures. While the number of foreclosures may increase slightly due to a slowing labor market and falling house prices, the impact will likely be minimal.
Low Housing Inventory
Jonathan Miller, a real estate appraiser who prepares the monthly Douglas Elliman Real Estate report for New York City, points out that the chronic lack of housing inventory has been a key driver of price increases during the pandemic. He expects this trend to continue in 2023, with limited listing inventory supporting prices. While there may be some modest growth in listing inventory, the overall decline in prices should be minimal.
Declining Home Prices
Taylor Marr, deputy chief economist for Redfin, predicts a decline in home prices in 2023. He expects the median U.S. home-sale price to drop by approximately 4%, making homes less affordable compared to pre-pandemic levels. The decline in prices will be most significant in boomtowns that experienced a surge in demand during the pandemic, as well as in expensive West Coast cities. On the other hand, housing markets in the Midwest and Northeast are expected to hold up relatively well.
New Home Construction Outlook
According to the National Association of Home Builders, single-family housing starts are projected to decline in 2022, marking the first drop in 11 years. Home builder sentiment has also declined for 11 consecutive months, indicating a contraction in home building for 2023. However, Robert Dietz, chief economist for the National Association of Home Builders, believes that single-family home building will lead a rebound in 2024 as interest rates fall and demand returns to the market. He also expects a decline in multifamily construction volume due to rising unemployment rates, increased supply, and slowing rent growth.
Building Conversions?
While some experts have speculated about commercial to residential conversions becoming more prevalent, Marc Norman, associate dean of the NYU School of Professional Studies' Schack Institute of Real Estate, believes that these conversions will remain more talk than action. The complex processes involved in shifting ownership, financing, and regulations for underutilized office spaces make widespread conversions unlikely in the short term.
In conclusion, while the housing market has cooled off from its previous highs, there are still significant changes on the horizon. The decline in mortgage rates, innovations in mortgage finance, and the stable outlook for foreclosures offer some hope for buyers. However, declining home prices and limited inventory indicate that the market will continue to be competitive. As we move into 2023, it's crucial for buyers and sellers to stay informed about the evolving dynamics of the housing market.
Note: This article was based on insights provided by industry experts and does not constitute financial advice. Please consult a professional for personalized guidance.
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.