With unpredictable rates on the horizon … how will home prices swing in 2023?

by Emily Mack

In October, mortgage rates topped 7% for the first time since 2002. Currently, the rate for a 30-year fixed rate mortgage is hovering around that benchmark — and is poised to go higher still. Naturally, we’re all wondering how these hikes will affect home prices in the coming year.

What does it mean for home sellers and buyers? And the agents who assist them? Mortgage rates first exceeded 7% on Oct. 27, prompting Freddie Mac Chief Economist Sam Khater to note in a press release, “As inflation endures, consumers are seeing higher costs at every turn.” Certainly, shoppers have noticed. But he also acknowledged a “greater stagnation in the housing market.”

Although the price of just about everything is skyrocketing right now, that’s not necessarily true for homes. In August 2022, the Case-Shiller Index revealed that home prices had fallen 1.3% since the peak seen in June, just two months prior. This marked the first dip since 2012, and the rate at which prices dropped was also staggering. Falling by the largest amount in recorded history, the price declaration broke records — and shook many agents.

Even in that extreme period, though, home prices were deep in positive territory due to early pandemic gains. But now, tempered by mortgage rates, experts are making new predictions as to how long those gains will hold.

Goldman Sachs presented a pricing model in October predicting that home prices in the U.S. will fall between 5% and 10% in the coming months. The model forecast a deeper hit following that month’s rate spike. “Our analysis suggests that housing poses downside risk to GDP across all G-10 economies,” the economists, Daan Struyven and Yulia Zhestkova, concluded in their report.

However, as rates began to fall again at the end of October, brokerages saw some relief on the horizon. “The Fed [has] brought into view the light at the end of the tunnel for slowing the pace of interest rate hikes, but that the tunnel’s exit may be more dreadful than expected,” Redfin Deputy Chief Economist Taylor Marr said in a November press release.

Marr pointed out that, amid high inflation, it may take longer than initially expected for mortgage rates to come down. “Record growth in rates was like a bucket of water poured on the flames to bring it into balance. It may take some time for the smoke to clear to see where things stand next year,” she said. It was a cautious assessment that Marr echoed in another statement from Redfin the following week: “Still-high home prices are propping up inflation. But things are changing fast — faster than the numbers we have would suggest … The typical home now sells for less than asking, price drops remain at a record high and seller concessions are becoming increasingly common.”

Meanwhile, other experts are predicting a near-full turnaround. In a statement released on Nov. 11, the National Association of REALTORS® (NAR) Chief Economist Lawrence Yun outlined a more positive outlook for maintaining home prices across the U.S. He predicts that home prices will hold steady … and maybe even rise.

Speaking recently in Orlando at the 2022 NAR NXT, The Realtor® Experience, Yun said that persistently low inventory will make up for softened demand. “Housing inventory is about a quarter of what it was in 2008,” Yun said. And in turn, “Home prices are holding steady since available inventory is extremely low.”

Yun also pointed out that, while prices are falling back in many places, some areas are actually seeing price gains. And while talk of a recession dominates the news, he ensured listeners that what we’re dealing with is not comparable to 2008. Yun said the sudden downturn in the housing market has had an “outsized impact” on the economy due to the sudden hike in mortgage rates.

Overall, he concluded that in 2023, home sales would decline by 7%, while the national median home price would increase by 1%. He also believes the housing market is in for a serious rebound in 2024, estimating a a 10% jump in home sales and a 5% jump in prices.

Local lenders are also making similar predictions. Tim Brigham, a branch manager with Union Home Mortgage, says that all signs point to price stabilization — or appreciation — regardless of whether mortgage rates decrease. In Chicago, in particular, demand is so high that Brigham says appreciation is likely. With many companies transitioning back to an office environment, downtown neighborhoods may be immune to the pullback caused by high rates.

In Chicago, you can’t build any more real estate,” Brigham said. But in other parts of the country, it’s a different story. “In rural areas, where you can build or maybe that were overbuilt, prices may go down.” In general, though, Brigham foresees home prices leveling out.

“The buyers today are able to negotiate, and there are still plenty of buyers out there, even though the rates have increased,” Brigham said. Plus, buyers can always refinance: “Marry the house, date the rate.”

Meanwhile, a broker’s perspective can offer an entirely different approach to the same figures. Millie Rosenbloom, a top producer with Baird & Warner, refrains from commenting on the future of home values. Rather, Rosenbloom says that when it comes to housing, “Transactions get done because of needs and wants … When there is a need for real estate, people will move forward with higher rates.”

To Rosenbloom, prices are hard to predict because they depend on the motivation of the buyer. And for the most part, it appears that prospective buyers remain motivated. “People will pay the higher price knowing they can refinance once rates come down,” Rosenbloom said. The alternative? Renting. “But then all you’ll ever have is a rent receipt.”

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