Predictions for the 2023 Housing Market

How will the Fed stop housing inflation?

The Fed is putting a halt to the Pandemic Housing Boom by selling bonds making the mortgage rates rise, and slowing the housing market down.

The current housing market has been deemed the Pandemic Housing Boom because of the rise in buyer demand during the pandemic. This coupled with historically low mortgage rates and super low housing inventory caused the home prices to rise drastically. The Fed hopes this will not be the case in 2023.

When the pandemic hit, the Fed started to purchase bonds making the mortgage rates drop to historical lows. The rising inflation has pushed the Fed to start selling bonds which will cause the mortgage rates to rise. Within the past six months, the average 30-year fixed mortgage rate went from 3.1% to 5.7%.

The rise in the mortgage rates has cooled off the rise in home prices. Unfortunately, it has also put a damper on many borrowers’ dreams of owning a home. Borrowers are having a harder time with the debt-to-income ratios and have lost their mortgage eligibility.

According to Zillow, home prices will jump an additional 9.7% between May 2022 and May 2023 instead of what has been seen over the past year of a rise of 20.4%. This slow down will still be double the average annual home price appreciation of 4.4%. Zillow has changed its views in the last few months cutting its price growth by 8.1% percentage points in the last four months. CoreLogic predicts a slower rise of only 5.3%, while Mortgage Bankers Association predicts a 3.1% and Fannie Mae a 3.2% increase.

“The trend appears to show that the market passed an inflection point for home values between April and May, transitioning from ever-hotter to somewhat-cooler price growth. This deceleration is a clear signal that buyers are dialing back their demand for homes in the face of daunting affordability challenges,” wrote Zillow economists in their latest outlook.

Some such as Capital Economics predicts home prices to fall 5%. This has only happened twice in the past
five years. Moody’s Analytics believes that there will be a 0% rise in some areas even seeing a 5% to 10% decline in home prices.

“Mortgage rates are rising and will reach 6.5% by mid-2023. As a result, mortgage payments as a share of income will exceed the peak seen in the mid-2000s. That will cut home sales, with existing sales ending 2022 more than 20% down from their end-2021 level. House prices will also decline as affordability constraints bite, but tight markets and a lack of forced sellers means we expect the drop to be relatively modest, with annual growth falling to -5% by mid-2023,” wrote Capital Economics in its latest outlook.

“The housing market has peaked. … Everything points to a rolling over of the housing market,” says Moody’s Analytics chief economist Mark Zandi.

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