Housing Forecast 2023

Although interest rates have climbed throughout 2022, on November 17^th, interest rates had the biggest drop in 41 years. Over the last few weeks, rates have continued to come down.

On November 22^nd, rates dropped 50 basis points to 6.58% from the 7% rate of prior weeks. For the week ending December 1st, rates had dropped to 6.49% and some lenders are offering a 30 year fixed rate at 6.33%. The average for all of 2022 was 5.26%.

Rates are tied to the Consumer Price Index (CPI) which measures inflation. Earlier this year, the CPI was at 9.1%, a 40 year high. By September, this number fell to 8,2% and was at 7.7% in October. The FED's target CPI rate is 2%, which means the FED may continue increasing rates through 2023.

We have heard how purchases and mortgage applications have declined. Borrowing costs increase with interest rates, and the sale price buyers could afford in 2021 has been reduced. We would expect home prices to be dropping significantly, but there are other factors at work.

INVENTORY HOLDING STEADY

Inventory, or the number of available homes for sale, is not increasing in the way that caused the housing crash of 2008. 85% of homeowners currently have an interest rate below 5%. Some had refinanced when interest rates dropped in 2021. To spur the economy during COVID, the FED had dropped rates to almost 0%.

Now, with interest rates higher, would-be sellers may be skeptical about re-entering the market. Redfin reported that many homes have been taken off the market or de-listed. Even while home prices are holding steady, and with some price reductions, the demand for homes still outweighs the supply. This is the factor that determines home’s values and is especially true in California.

When we add in how home builders are losing confidence, new construction is expected to decline in 2023. In 2008, too many homes came onto the market at one time, causing an enormous erosion in home values. Today, the number of buyers is decreasing – but the lack of available homes is something that is keeping home values somewhat stable.

ARE RATES RISING OR FALLING?

The FED confirmed a smaller hike for the prime rate again in the 2^nd week of December. Over the last several months, they had been raising the rate 75 basis points each month. They will only raise the rate 50 basis points in December, which is why many lenders dropped their 30 year fixed rates. Inflation numbers are declining, which affects how much the FED will raise the rates.

Most forecasters agree that demand for homes in California will remain strong into 2023. However, most of the homebuyers are younger and waiting for better news on interest rates. Mortgage applications did rise at the end of November, as expected when the rates fell below 7%.

We haven’t quite transitioned to a classic buyer’s market, but buyers have much more leverage than they had in 2021 and into the spring of 2022. They are no longer waiving inspections and contingencies. Homes are selling below asking price at around 97% of list price. The days of multiple offers are gone.

BE PREPARED TO LOCK

This is an excellent time to get your credit history and finances in order in preparation for purchasing. You might want to get a credit report to see if you can improve your rating prior to locking in a rate. If you are ready to move when and if interest rates drop again, you will save a lot of money.

If the FED rate holds around 4.5 to 5% in 2023 as expected, mortgage rates may rise above the 7% mark again. This is clearly a time to consider locking in your rate at 6.5%. Just like supply and demand in homes, lenders are reducing rates as demand for mortgages drop. When more buyers come back into the market, the rates may move higher.

With so much information about changes in the housing market, it is important to work with a realtor who is familiar with the local market. Statistics in the US will not compare to what is happening in California. In resort markets, supply and demand are different than what happens in primary markets.

Contact me today for more information about the Lake Tahoe, Plumas and Sierra County real estate markets.