Though winter may still be months away, housing market activity—already cooling due to eye-popping home prices and interest rates—may be on the verge of a deep freeze.
The national average 30-year mortgage rate rose to a 23-year high of 7.49% in the first week of October, according to Freddie Mac.
Given current rate conditions, it’s no wonder that year-over-year existing home sales sagged for the third consecutive month, slipping by 0.7%, with all four major U.S. regions posting declines, according to the National Association of Realtors (NAR).
Nonetheless, the housing market remains competitive for prospective buyers. With many homeowners “locked in” at low interest rates and unwilling to sell, demand continues to exceed for-sale inventory.
Housing Market Forecast for October 2023
Housing market activity remains weak thanks to rising mortgage rates, elevated home prices and constrained housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis. To make matters worse, the Federal Reserve may raise the federal funds rate once more before year’s end to further tame inflation.
The federal funds rate is the benchmark interest rate financial institutions charge each other for overnight loans. The rate hovered near 0% in March 2022. Then the Fed began raising rates to bring down inflation to a 2% goal. After 11 interest rate hikes, the current rate range is 5.25% to 5.5%, the highest in 22 years.
Fed Signals Rates Will Stay Higher for Longer
Fed projections suggest the terminal federal funds rate will reach 5.6% by the end of 2023, implying at least one more 25 basis-point rate increase this year. A basis point is one-hundredth of one percentage point.
Changes to the federal funds rate can indirectly influence mortgage rates. Yet, housing market experts are less concerned about one more interest rate hike this year than what the Fed has in store for rates in the coming years.
“Right now, it’s more about what the Fed intends to do rather than what it does,” says Keith Gumbinger, vice president at mortgage website HSH.com. “[W]hile not meaningless, another quarter-point hike at this point won’t change the big picture much, as a lot of the ‘damage’ from higher interest rates is either done or is already in process.”
Gumbinger says what matters most is how long policymakers plan to keep rates elevated and when they’ll begin implementing rate cuts.
Fed policymakers signaled at their September meeting that interest rates could stay “higher-for-longer,” adjusting policy rates a half a point higher for the end of 2024 and 2025 in their latest projections.
Consequently, many housing market experts forecast mortgage rates remaining elevated for the remainder of this year—and possibly into 2024.
When Will The Housing Market Recover?
For a housing recovery to occur, Gumbinger says several conditions must unfold.
“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Gumbinger says. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”
And, of course, interest rates would need to cool off.
But Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.
“Better that rate reductions happen at a metered pace, incrementally improving buyer opportunities over a stretch of time, rather than all at once,” Gumbinger says.
He adds that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also help the housing market, over time, return to 2014-2019 levels.
Yet, Gumbinger predicts it could be a while before we return to those rates.
Where Do Mortgage Originations Currently Stand?
With the average 30-year fixed mortgage rate sitting comfortably above 7%, a 5% mortgage rate seems like a distant dream.
Despite elevated rates, mortgage originations trended up in the second quarter of 2023 to $463 billion after amounting to only $333 billion in the first quarter, according to Mortgage Bankers Association (MBA) data.
Even so, the MBA expects originations to decline and remain muted through the rest of 2023 and into early 2024.
Today’s mortgage spread—the gap between the 10-year Treasury bond yield and the 30-year fixed rate mortgage—is around 300 basis points. Given historical trends, the spread should be between 150 and 200 basis points. A more normalized spread would likely prompt more would-be homebuyers to re-enter the market.
However, when the spread could begin to narrow is up in the air.
“It’s possible that the spread will decrease when the Fed finishes its monetary tightening, which could be in the coming months,” said Odeta Kushi, deputy chief economist for First American, in a recent report. “[I]f the spread narrows, then mortgage rates could come down even if the benchmark 10-Year Treasury stays the same.”
Housing Inventory Outlook for October 2023
Housing stock remains at near historic lows—especially entry-level supply—consequently propping up demand and sustaining ultra-high home prices.
To make matters worse, new home construction, which had been helping pick up some of the slack, receded in recent weeks.
“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group. “We think that it is highly unlikely that the inventory problem will be resolved in 2023.”
After a speck of good news for resale inventory in July, existing-home stock slipped 0.9% in August, according to NAR. Unsold inventory remained flat month-over-month and currently sits at a scant 3.3-month supply at the current sales pace. Many experts say a balanced housing market has four to six months of inventory.
Sales of existing-home sales were also tepid, down 0.7% in August and a whopping 15.3% from a year ago.
Save for a slight bump in April, year-over-year home sales have trended down markedly since February of this year—and the near term isn’t showing much promise for improvement. Pending home sales—a bellwether for existing-home sales—plummeted 7.1% in August and 18.7% from a year ago.
“It’s clear that increased housing inventory and better interest rates are essential to revive the housing market,” said Lawrence Yun, chief economist at NAR in a press statement.
Meanwhile, at the current sales rate, the seasonally adjusted estimate of new houses for sale was 436,000 at the end of August, representing 7.8 months of supply at the current sales pace, down from 8.7 months of supply a year ago, according to the latest data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD).
Unable to withstand mortgage rates over 7%, new home sales were also down in August, slumping 8.7% to a seasonally adjusted annual rate of 675,000.
But experts say it’s not just elevated mortgage rates and home prices causing this latest downward sales trend.
“Higher mortgage rates and higher prices are factors, but the significantly lower new home sales in August is probably because there aren’t enough of them on the market,” said Robert Frick, corporate economist with Navy Federal Credit Union, in an emailed statement. “And builders are having a tough time keeping up with demand due to a variety of constraints.”
Housing Starts Forecast for 2023
There were ominous messages in the construction realm, revealing home builder skittishness amid escalating mortgage rates and other industry challenges.
Single-family construction starts sagged by 6.7% in August, though applications for building permits rose 2% from the previous month, according to the Census Bureau and HUD.
Yet, builder confidence took a nosedive for the second consecutive month, following a seven-month streak of increases.
The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment sank from 50 to 45, putting builder confidence back into negative territory. A reading of 50 or above means more builders see good conditions ahead for new construction.
Prompted by rising mortgage rates, builders lowered home prices to boost sales. Roughly one-third of builders cut prices in September—the highest since December 2022. Moreover, 59% of builders reported offering all forms of buyer incentives in September.
“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” said Robert Dietz, chief economist of NAHB, in a press statement.
Builder headwinds also include a shortage of workers and tighter credit conditions due to the Fed’s aggressive interest rate hikes. Rising insurance costs and fewer options are also contributing to builders’ concerns.
Affordability Struggles Sideline Hopeful Homebuyers
In August, 82% of consumers reported putting home-buying plans on hold, according to the latest Fannie Mae Home Purchase Sentiment Index (HPSI).
At the same time, home affordability sank to its lowest level in more than three decades, according to the latest Real House Price Index (RHPI) released by First American Financial Corporation.
Other indices also reflect a bleak picture.
For instance, the Federal Reserve Bank of Atlanta National Home Ownership Affordability Monitor (HOAM) Index plummeted to an all-time low of 68.4. A reading below 100 indicates that median household income cannot cover annual costs associated with owning a median-priced home or more than 30% of annual income is going towards homeownership.
An individual’s total housing costs should be at or below 28% of their gross income.
To put today’s affordability challenges into context, a homeowner living in a typical metro area during the second quarter of 2023 needed to earn at least $99,600 to afford monthly housing payments, up from $52,600 three years ago, according to Harvard Joint Center for Housing Studies data.
These Would-Be Homebuyers Have It the Worst
First-time buyers hoping to land a home at a lower price point are likely having the hardest time.
Starter home costs are on an upward trajectory that has put homeownership further out of reach for those already constricted by limited down payment savings and incomes that can’t keep pace with costlier monthly payments, according to Realtor.com data.
For example, first-time homebuyers hoping to buy a starter home will need to earn about $64,500 a year—that’s 13% more than a year ago, according to a Redfin report. A typical starter home hit an all-time high of $243,000 in June.
Weakening affordability conditions for first-time buyers is further underscored in NAR’s latest First-Time Homebuyer Affordability Index. The preliminary second-quarter reading came in at 61.4, compared to 67.4 in the first quarter. A reading of 100 indicates that a family earning a median income earns exactly enough to qualify for a mortgage and afford a typical home.
In other words, the typical first-time homebuyer is nowhere near earning the level of income required to afford a home.
Will the Housing Market Crash in 2023?
Even as mortgage rates marched upwards, home prices notched a sixth consecutive month of gains, hitting record highs in July and further contributing to affordability challenges.
National home prices rose at an annual rate of 1%, according to the latest S&P CoreLogic Case-Shiller Home Price Index, a leading monthly tracker of U.S. home values. After seasonal adjustment, prices saw a 0.6% increase between June and July.
“U.S. home prices continued to rally in July 2023,” said Craig J. Lazzara, managing director at S&P DJI, in the report. “On a year-to-date basis, the National Composite has risen 5.3%, which is well above the median full calendar year increase in more than 35 years of data.”
Even so, stark differences continued at the regional level, with last month’s winners still leading the pack.
“The three best-performing metropolitan areas in July were Chicago (+4.4%), Cleveland (+4.0%), and New York (+3.8%), repeating the ranking we saw in May and June,” said Lazzara.
On the flip side, home values continued to plunge in pandemic boomtowns, with Las Vegas (-7.2%) and Phoenix (-6.6%) at the bottom. The West (-5.9%) and Southwest (-3.6%) took the prize for the weakest regions.
Despite some areas seeing price declines, the likelihood of a housing market crash—a rapid drop in unsustainably high home prices due to waning demand—still remains low. Experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes.
Even so, with fewer homes selling, Dan Hnatkovskyy co-founder and CEO of NewHomesMate, a marketplace for new construction homes, sees a price collapse within the realm of possibility, especially in markets where real estate investors scooped up numerous properties.
“If something pushes that over the edge, the consequences could be severe,” said Hnatkovskyy, in an emailed statement.
Will There Be a Lot of Foreclosures in 2023?
Foreclosures ticked up month over month, according to a recent report from ATTOM, a property data provider.
In August, foreclosure filings were up 7% from July but down 2% from last year, according to ATTOM. Foreclosure completions were up 4% from the previous month and up 9% from a year ago.
The five states with the highest foreclosure rates in August were, from highest to lowest, Nevada, Illinois, South Carolina, New Jersey and Delaware. States that had the highest number of completed foreclosures—real-estate owned properties (REOs)—were Illinois, Pennsylvania, Ohio, New York and Texas.
While foreclosure rates are up year over year, experts still do not expect to see a wave of foreclosures in 2023. Some 49% of mortgage-owned residential properties in the U.S. were equity-rich in the second quarter of 2023, according to an ATTOM report. In other words, the combined estimated market values for those properties were worth at least double the estimated loan balance amounts, providing homeowners a safe cushion from foreclosure.
When Should I Buy a Home in 2023?
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.
Use a mortgage calculator to estimate your monthly housing costs based on your down. But if you’re trying to predict what might happen next year, experts say this is probably not the best home-buying strategy.
“The housing market—like so many other markets—is almost impossible to time,“ says Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “The best time for prospective buyers is when they find a home that they like, that meets their family’s current and foreseeable needs and that they can afford.”
Gumbinger agrees that it’s hard to tell would-be homeowners to wait for better conditions.
“More often it seems the case that home prices generally keep rising, so the goalposts for amassing a down payment keep moving, and there’s no guarantee that tomorrow’s conditions will be all that much better in the aggregate than today’s.”
Divounguy says “getting on the housing ladder” is worthwhile to begin building equity and net worth.
Pro Tips for Buying in Today’s Housing Market
Frick offers this expert advice to aspiring buyers:
- Move to a lower-priced housing market if you can switch jobs or work remotely
- Get all your ducks in a row in advance so you can act fast—review your financial situation, gather required documents, shop multiple lenders and strengthen your credit score
- Check prices and listings regularly to beat out the competition
- Know how much your monthly payment will be—complete with taxes—and how well that fits into your budget
- Ask Me, Melissa, about the local real estates market.
Pro Tips for Selling in Today’s Housing Market
Divounguy has this expert advice for sellers:
- Work with a real estate agent to get your pricing right, encourage buyer competition and sell faster
- Get your home in shape to sell sooner rather than later
- Set up your home’s online curb appeal
- Include a 3-D home virtual tour or an interactive floor plan for more page views and saves
- Ask me, Melissa, about the local real estate market.