Our 2023 Housing & Mortgage Market Predictions

Minneapolis, MN: Wow, what a ride the past three years have been.  From super low mortgage interest rates, crazy one day way over asking price multiple offers, to 40-year high inflation, highest mortgage rates in decades, and a bludgeoned housing market.

This has left many wondering what 2023 will bring, so here is our annual predictions.

Home Prices:

We really don't expect to see any real noticeable drop in home prices, to the disappointment of potential buyers. This may sound confusing, as currently we see many listing with a price reduction.  This has less to do with actual falling prices, and more to do with sellers living in a 2021 mindset of asking for pie in the sky prices (and getting them), versus today, setting a realistic asking price, and getting that realistic asking price. 

We actually anticipate home values to increase, but at a much smaller number that the double digits of the pandemic years, figure in the 4% to 5% range.  The primary driver of this is that we still have a housing inventory shortage, with nothing in site improving that situation.

Home Sales

The number of homes actively on the market at any one time will be larger than in previous years.  Not necessarily because more homes will be going up for sale, but rather those for sale will be sitting on the market longer because less people are able to afford homes today. For those looking, this is a huge benefit.  You no longer need to look at the house on day one, and make an overpriced offer.  You can take your time, plus, historically common items when negotiating on a home purchase are back, including:

• Inspections
• Having seller repair items
• Seller paid closing costs
• FHA offers

This also means the total number of home sales will drop.  The big jump in homes prices during the pandemic years, combined with higher interest rates today, simply makes ownership unaffordable for many.

Then factor the entire country refinanced to upper 2's and low 3's. Looking at this, many of those people have simply told me they are not going to give up their current low rate by moving. 

Mortgage Interest Rates

Mortgage interest rates should drop. The question is to what and when.  As the Feds efforts to control inflation start working, you should see a hand-in-hand movement.  Lower inflation, lower mortgage interest rates. As I write this in early December 2022, we have already seen mortgage rates drop from over 7% to around 6.375%.  I wouldn't be surprised to see than fall into the mid to upper 5's by spring 2023, then maybe hold in that range through the end of 2023 before moving lower.

Confusing this statement is that people don't fully understand the relationship between long-term mortgage rates, like the standard 30-year fixed, and what the Federal Reserve does or doesn't control about mortgage rates.  The easiest way I explain this, is assume there are 10 things that go into determining today's mortgage rates. What the Fed does is just one of the 10 items.  9 other factors also control interest rate directions.

Variables

There are always plenty of variables.  The world is a big place. Everything from bad policy here, increased inflation, to wars on the other side of the worlds could flip the apple cart and blow these predictions out of the water. But historically speaking, many of these things follow fairly predictable patterns, leading us to a high confidence level.

The Bottom Line:

Should you buy a home in 2023?  Probably. Home prices are not expected to drop.  While rates are historically OK today, it is still a big jump from the most recent years, making buyers, especially first-time home buyers, struggle with the higher payments and affordability. If you can swing the payments today, anticipate refinancing to something lower in the next few years.

Income numbers are also way up. Younger buyers should anticipate their income will increase over the years, making payments easier.  Ask your parents or grandparents what their first house payment was.  You'll laugh. But it was then, and is now, always about debt-to-income ratio's.  They made a lot less each year back then, and their payment was smaller, but maybe that payments was 40% of their income.  Today the home prices are higher, the yearly income is higher, but maybe you'll also have a 40% debt-to-income ratio.

Finally, we all need a place to live, and rent is a 100% interest rate.