The real estate sector is highly sensitive to interest rates, inflation, and housing prices. Whether you are a buyer or a seller, housing market interest rates can influence your decision-making process. It plays an integral role in determining the availability of mortgages and affordability, which can directly impact the purchasing power of potential buyers.
Therefore, understanding how interest rates will influence housing marketing in 2023 can help you make an informed choice.
Understanding the Historical Trends in Mortgage Interest Rates for the Housing Market
Historically, housing market interest rates demonstrate a cyclical pattern, constantly fluctuating in the face of fast-changing marketing and economic conditions. There have been periods of lows and highs over the past few decades – impacting homebuyers’ affordability and purchase decisions.
If you consider historical trends from the early 1980s, you’d find that the mortgage interest rates were at a peak, around 18%. This dramatically affected the housing market as affordability was the primary concern. On the other hand, the rate of interest dropped remarkably during the financial crisis of 2008. This helped boost the real estate market and the economy.
Another key understanding from historical trends is that rates of interest in the real estate sector are associated with the overall economy. During the economic growth of any country, the interest rates are likely to be higher and lenders would want to make the most of the favorable conditions available. On the other hand, during times of recession or economic downturn, the rates of interest are likely to be lower.
The central banks and the government would want to boost spending and borrowing to kickstart the economy during a recession. As such, the interest rates tend to be lower. Another factor that influences interest rates in the housing market is inflation. It determines the increase in the price of goods and services over a period. As such, during times of inflation, the rates of interest tend to be higher. It happens because the value of money decreases and the lenders need to compensate for it.
Current Interest Rates and Their Impact on the Housing Market in 2023
It’s May, yet the homebuying season hasn’t bloomed as expected. As of April 2023, mortgage rates have increased 15 basis points. Adding to it are the existing and pending home sales from March. The beginning of May witnessed an average interest rate of 6.52% on 30-year fixed mortgage plans. Inflation continues to be a problem for the housing market. To keep pace with it, the Federal Reserve has hiked the interest rates in a row. There were early projections that the Fed may consider the current turmoil in the banking industry and refrain from hiking the interest rates. However, they continued increasing their short-term rates of interest to combat inflation.
And according to a recent report by the National Association of Realtors, the sales of existing houses declined in March, falling 2.4% from February 2023 and a whopping 22% from March 2022.
So, how will interest rates influence the purchase and sale of homes in 2023? Read on to understand housing marketing projections for 2023 and the varying factors that will continue to affect demand and supply through the rest of the year.
Will Mortgage Interest Rates Rise in 2023?
Amidst the economic downturn and turmoil in the banking industry, one question that will keep pondering the minds is – will the cost of home financing come down in 2023?
According to some industry experts, the chances are meager. They have also highlighted probable reasons such as overall higher rates of interest, sustained inflation, geopolitical challenges, and a potential recession this year. This will push the mortgage rates higher for 15-year and 30-year loans, averaging 8.25% and 8.75% respectively throughout 2023.
On the other hand, some experts are optimistic, stating that interest rates may decrease slightly this year. However, it is unlikely that interest rates to reach their rock-bottom level in 2020 and 2021. The first half of 2023 will see mortgage rates fluctuate up and down. During the second half, you can expect the rates to come down gradually, hanging around 5.25% and 6.0% for 15-year and 30-year mortgage loans respectively.
Whether interest rates will continue to rise in 2023 or not depends entirely on how efficiently the Federal Reserve can control inflation. While predicting whether mortgage rates will rise this year, Nadia Evangelou, director of real estate research and senior economist at the National Association of Realtors, suggested three probable scenarios. These include:
- Inflation will continue to rise in 2023. This will force the Federal Reserve to repeatedly increase its interest rates. As such, the mortgage will also increase, reaching nearly 8.5%.
- The Consumer Price Index will respond to subsequent interest rate hikes by the Federal Reserve. As such, inflation will gradually decelerate, stabilizing mortgage rates between 7 and 7.5% this year.
- To combat inflation, the Federal Reserve will raise its interest rates continuously. This will push the economy into a phase of recession. This can cause the mortgage rates to reduce to 5%.
As the interest rates will continue to fluctuate in 2023, their impact on the housing market can be wide-ranging.
Will the Rising Interest Rates Impact the Housing Market in 2023?
Needless to say, interest rates have a remarkable impact on the housing market. Standing in 2023, the real estate sector continues to face significant challenges in response to higher interest rates. The Federal Reserve has made major policy shifts to curb inflation and boost the economy. As a result, the rates of interest are soaring high. This uptick has resulted in higher mortgage rates, which means higher monthly payments for potential and existing homebuyers.
In the face of higher interest rates and mortgage costs, home prices have declined modestly ever since their peak during mid-2022. According to industry experts, even a 1% increase in mortgage interest rates can lower buyers’ home purchase affordability by almost 7.4%. Two-thirds of the economy saw a drop in housing prices in the recent quarter, adjusting the hiking of interest rates. Additionally, policy rates have increased by almost 4% points across all major economies.
From near zero, the rate of interest has increased to 4.5 – 4.75% in the United States. And this is the fastest pace at which the interest rate has increased in the past two decades. This has resulted in a sharp hike in the average mortgage rate of a 30-year fixed home loan, rising to 7.1% during late 2022. However, mortgage interest rates have ticked down slightly during the first week of May 2023. The weekly averages as of April 5, 2023 stands are 6.39% for a 30-year fixed mortgage and 5.76% for a 15-year fixed mortgage.
Spring happens to be the busiest home-buying season. However, 2023 remains to be a mixed bag. Despite hiking rates, potential homebuyers have started to acclimatize to the present rate environment. But on the other hand, constantly rising home prices and a lack of inventory are expected to exert pressure on affordability. This is particularly true of rate hikes and home prices increase beyond buyers’ income growth.
According to the U.S. Department of Housing and Urban Development, the median family income was $90,000 in 2022. On the other hand, the sale of an existing home in March 2023 was priced at $375,700 as per the National Association of Realtors. So, if we consider a mortgage rate of 6.52% and a 20% down payment, the average monthly payment will be $1,916. This consists of 26% of an average U.S. family’s monthly income.
There has been a rise in median family income since last year. But the average mortgage rate has almost doubled this year and eventually, the median home price has also increased. This has significantly affected the affordability of homebuyers. Experts predict a strong demand from first-time buyers, keeping in mind that a large percentage of millennials will hit the age of first-time homebuyers over the next few years. However, higher interest rates and affordability will continue to remain a challenge for the housing market.
What’s the Housing Market Look Like in 2023?
So, how will the housing market look like this year? Will housing prices go down? Will sales drop this year?
Most industry experts suggest that the housing market will be challenged by higher borrowing rates, less demand, and lower home prices. An increase in interest rates and lack of supply has pushed many interested homebuyers to their sidelines of purchase. You can expect home prices to fall slightly in the coming months, but not dramatically. This may make it challenging for potential homebuyers to find affordable housing.
According to an article published on Forbes Advisor, buyers may get some relief in the form of increased availability of affordable homes in the market. It may level out the field to some extent, experts believe. The US News & World Report predicts that the housing market will witness a shallow recession this year. This may help bring inflation under control in 2024, stabilizing the mortgage rates.
On the other hand, Zillow predicts that the affordability of homebuyers may improve slightly in the coming months. While low inventory and higher mortgage costs will continue to plague the housing market, the conditions may remain stable a bit. This can be good news for first-time buyers who are looking for affordable homes.
According to experts, the fast-changing demographics of potential homebuyers will influence the housing market in 2023. Baby boomers retiring this year are likely to downsize their demand to purchase new or existing homes. It will create opportunities for younger homebuyers who have recently entered the market. Hence, it is estimated that millennials will drive the housing market this year, while many of these homebuyers will reach their peak in the coming years.
Will Home Prices Drop?
A common question facing potential homebuyers is – will homes be affordable in 2023?
Experts suggest that buyers will continue to see higher home prices throughout the year, except that it can be relatively flat during the later months of 2023. According to Bankrate’s Chief Financial Analyst, Greg McBride, prices in the housing market will remain steady in a lot of markets and buyers can expect a price 40% higher than what it was during pre-pandemic times.
The real estate sector is hit by higher interest rates and low demand. Regardless of this, many developers had not increased their property prices during the last few years. However, growing input costs are plaguing construction companies and this can drive home prices to rise in 2023. However, if the pressure of inflation declines and current mortgage rates are pulled back, it will help relieve some of the pressure on buyers, suggests industry experts.
Experts also highlight that housing prices will not decline proportionately. Any percentage of drop in prices can offset the growing interest rates and their impact on mortgage costs. Emphasizing the positive side, experts said that this won’t affect overall home affordability significantly. Even the slightest fall in home prices will attract house hunters because many potential buyers are waiting patiently to enter the housing market.
Will Sales Drop in the Housing Market in 2023?
Considering the turmoil the housing market is going through in response to higher interest rates and low demand, it is evident that sales will decline. But how much?
If inflation remains high and interest rates climb repeatedly, the mortgage rates will also be higher. This can result in more than a 10% drop in home sales this year. Even if mortgage interest rates stabilize in the face of the gradual slowing down of inflation, home sales will continue to drop by 7 – 8%. And if the economy enters into recession and interest rates drop, home prices will drop further by over 15%.
The drop in home sales started during the second half of 2022 and is expected to continue in 2023. Property listings will remain stagnant on the market for a long time before getting sold. However, this time the market is slowly moving towards normalcy recently. As the market is set to cool down, listings will remain on the market for 30 days or more this year. However, the average days a property listing stays on the market will increase two to three times compared to current levels.
Will Home Inventory Increase in 2023?
When it comes to current home inventory levels, the scenario is a mixed bag. In some places, there are almost double active list counts, while other places are short by 25%. According to experts, there were only fewer home listings during the months of fall. They were also remaining on the market longer. Furthermore, a greater number of homes were also taken off than usual.
Considering the inventory scenario, the housing market is relatively fluid as of now. As buyer activity will spike during the spring, there will be a lot of homes hitting the market as soon as the mortgage rate gets stable. But on the other hand, existing home inventory will continue to remain low as current homeowners are not ready to trade in their low mortgage rates to buy a new home with a 7% interest rate. Additionally, the market will also not see significant growth in supply from new construction.
Conclusion – 2023 Will Still be a Buyer’s Market
For the past two years, the sellers evidently had an upper hand in the housing market. But recently, buyers are hitting back and making their presence felt in many markets. Economic downturns, higher interest rates, affordability issues, and lower inventory levels will push down the demand from homebuyers. However, the market will remain balanced rather than tilting on one side.
As more and more people are getting back to normalcy post-COVID and also seeing income growth, experts predict that larger markets will revert back positively and witness an increased demand from homebuyers. These predictions provide valuable insights into what the housing market looks like in 2023 and what to expect.
