The real estate market has changed drastically from a year ago. Investors have enjoyed several years of favorable market conditions, with low supply and high demand, low interest rates, and flexible opportunities in an environment that has shifted due to high inflation and rising real estate prices. Many investors are looking ahead and wondering what to expect in 2023. Is the market moving up or down?
From Sharestates’ perspective, there are three primary factors influencing the real estate market entering 2023:
- Housing inventory – There is still a low supply of housing, with falling demand.
- Mortgage rates – The Fed spent the entirety of 2022 tinkering with the fund rate, which has led to a rise in mortgage interest rates.
- Home prices – Home prices increased across the board last year, but that rise tapered off toward the end of the year. In some markets, prices began to decline.
Moving into 2023, these three factors will continue to influence the real estate market, but let’s discuss specifics.
When Will Housing Supply and Demand Reach Equilibrium?
New home sales, housing starts, and existing home sales were all down in 2022 compared to 2021. The decline can be attributed to the rise in home prices throughout the year coupled with rising interest rates, which did slow down the increase in real estate prices toward the end of the year. Some markets saw a reduction in prices by the end of the year, but prices were still higher than they were a year before in those markets.
Needless to say, demand for housing has fallen sharply due to these two factors: pricing and mortgage interest rates.
While low housing supply will continue to provide great opportunities for investors, the fix-and-flip market will see a decline if homeowners are not interested in buying houses. Either investors will have to sell homes at lower prices, cutting into their profits, or they’ll have to shift to a buy-and-hold strategy. Rentals are promising to be a hot market opportunity in 2023 as a result of dampened demand in the home buying market.
Coming out of the pandemic two years ago, home builders saw increased opportunities, but those fell through the floor in the last quarter last year as new starts fell off. Building permits declined 17 percent in September.
With new starts and fix-and-flip opportunities retreating, it will be a year or longer before we see supply and demand get anywhere near equilibrium. There’s no reason for alarm as there are still opportunities in the real estate market, but investors should scrutinize every deal before leaping in.
Will Mortgage Interest Rates Rise or Fall?
Falling demand in a market still characterized by low housing supply is not an ideal investing environment, especially for fix-and-flip investors. However, all is not lost.
The question is whether the Fed’s monetary policy strategy will continue to drive home prices down and interest rates up. If it does, the home buying market will favor those home buyers with more cash on hand. The cost of acquiring a new home will be higher in the long term due to higher mortgage interest rates. According to Bankrate, the national average mortgage interest on a 30-year-fixed conventional loan is 6.52 percent. That could go as high as 8 percent by the end of this year.
We don’t see mortgage rates going lower this year. If anything, they’ll go higher.
Will Home Prices Continue to Fall?
In May 2022, Bill McBride, writing for the CalculatedRisk newsletter, predicted sharp declines in home prices. However, his conclusions weren’t as bad as they might seem. He noted that the financial crisis in 2008-2009 caused a sharp decline in home prices for several years. In a word, it was a “bust.” The current slide in housing prices won’t get that bad, he said.
Instead, McBride said the market will stall. What that means is that price growth will slow down, and it will likely decrease in some markets. Using the Case-Schiller National Index, he showed similar stalls in 1982 and 1991. Both of those stalls followed long periods of price declines. However, in 1982, he noted that the decline that year was only 1 percent while it was 3 percent in 1991. McBride also noted the difference between real price declines and nominal price declines.
Home buyers are only concerned with nominal prices, not real home prices, while sellers are less likely to sell when prices are in decline. But there are homes that must sell. For instance, when real estate is a part of an estate, when couples divorce, or when an employee relocates.
These are some of the reasons McBride predicts a housing price stall and it seems likely that will be the case. We expect to see further declines in home prices, but they won’t get back to the price they were before the beginning of last year.
Where Are the Best Opportunities for Real Estate Investors?
The question on many people’s minds is will more foreclosures hit the market if the economy tailwinds into a recession. Probably not.
For one thing, many homebuyers are in a better equity position than they were in 2008 and 2009. If anything, a recession could cause a rise in home equity loans. It is also not likely we’ll see a housing market crash.
We could see 2023 shift toward a buyer’s market by the end of the year as home prices continue to fall. While home prices won’t change the supply situation directly, as more homebuyers enter the market due to falling prices, housing supply will increase as builders rush to meet the demand. We’ll still likely see an undersupply of homes at the end of the year, but it will be less pronounced.
On the other hand, there is another scenario that could play out. As the cost of buying a home levels, it will still be too high for most homebuyers causing a dip in home sales. As supply inches upward, we could see that change by the end of the year with the market opening for buyers going into 2024.
We won’t say the fix-and-flip market has dried up, but investors will have to look harder to find great deals. In 2023, the shift will be toward rental properties. With prices falling, investors will want to hold their properties for a longer duration. But they’ll also want to monetize them, and that means single-family and multifamily rentals are likely to dominate in most markets. As long as some families are priced out of the homebuying market, rentals will be a market necessity.
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