You may be in the market to buy a house, know someone who recently purchased or are waiting for the right time to start looking, but you’re likely aware that the real estate market is tough right now. In Gallup’s annual Economy and Personal Finance Poll, conducted in April and published in early May, 69% of respondents said now is a bad time to buy a house – the first time a majority of Americans have felt that way in the poll’s 44-year history.
There are certainly factors contributing to the majority sentiment – few homes on the market, rising interest rates and new housing construction that isn’t able to have a significant impact on demand. But that doesn’t necessarily mean it’s a bad time to buy for everyone, and it doesn’t mean it’s a bad time to be a homeowner. In fact, current conditions may mean current homeowners are in a position to sit comfortably.
Here are a few housing market trends shaping up this summer and in the latter half of 2022:
- Rising interest rates make buying a home more expensive, and homeowners are disinclined to sell.
- The prime time for refinancing mortgages has passed.
- Affordability limits are also reaching the new construction market.
- Rents are still rising, but not necessarily as fast as the last year.
Experts are breaking down current conditions and predictions for buyers, sellers, new construction and renters for the rest of 2022.
Buying
Despite mortgage interest rates remaining historically low over the past two years, homebuyers have struggled to be able to find houses on the market. “The inventory is there, but it’s just a matter of it’s flying off the shelves in a matter of days,” says Nick Bailey, CEO of Re/Max.
When buyers are able to make an offer on a home, fierce competition among buyers has driven prices up, and the beginning of 2022 saw that trend continue. The Federal Reserve Bank of St. Louis reports the median home sale price for the first quarter of 2022 was $428,700, nearly 19% above the median sale price for the first quarter of 2021, which was $369,800.
Since the end of 2021, mortgage interest rates have also been on the rise after nearly two years near or below 3%. As of May 19, the average mortgage interest rate for a 30-year, fixed-rate mortgage was 5.25%, according to Freddie Mac. Rates are still low from a historical perspective, but much higher than recent memory.
With higher interest rates, the total cost of a home for buyers rises even beyond already sky-high prices. “If I were to go and buy a home, I have to pay more per month for it, and so there’s the affordability crunch,” says Mark Fleming, chief economist for First American Financial Corporation, which provides title insurance and risk solutions services for real estate transactions.
While that will likely mean some buyers will opt not to purchase a home this year, it means active buyers can worry less about bidding wars and dropping concessions in order to entice a seller.
“It’s going to cool the competitive landscape a bit, and prices are stabilizing,” Bailey says.
Selling
Stabilizing prices provide some relief to buyers, but that doesn’t mean sellers are losing out. Both Bailey and Fleming note that prices are likely to continue to rise in most markets, but at a slower pace than we’ve seen over the past two years.
The rate of home value appreciation over the past two years is unsustainable in the long-term – it’s simply been too high for buyers to be able to keep up much longer. Homeowners can be happy with what has happened though: Bailey points out that in most markets throughout the U.S., the average annual equity gain for homeowners is higher than average salary growth.
Even so, expect fewer homeowners to put their home on the market as interest rates remain high compared to recent years. Sellers, in most cases, will also need to purchase a new home to move into, and most don’t feel the need to trade their current low-rate mortgage for one that has a higher rate and doesn’t have the same equity.
Fleming describes the dilemma homeowners currently face as a rate lock-in effect: Homeowners have in previous years locked in a much lower interest rate, and so selling a home to buy a new one now costs extra money because interest rates have risen. “The rate lock-in effect creates a financial penalty to moving,” Fleming says.
Homeowners are also unlikely to refinance their mortgages in the near future, as there’s no incentive to refinance to what would likely be a higher interest rate than the rate obtained in the last two or three years.
Not all homeowners are capable of remaining in their home, however. Legal services company LegalShield uses its data collected from customers seeking legal help on various issues to measure financial activity in its Economic Stress Index. When it comes to foreclosures, the index rose in April for the fourth straight month.
However, at least part of that is still related to the catch-up from the foreclosure moratoriums put in place in 2020 during the first months of the COVID-19 pandemic. The federal moratorium ended in September 2021, and many local moratoriums have since ended as well.
Matt Layton, senior vice president of legal services for LegalShield, notes that the U.S. is still at “almost record lows for foreclosure rates” compared to the time prior to the pandemic. As affordability crunches continue to put financial pressure on people, “we think we’re going to continue seeing an increase in foreclosures,” Layton says.
New Construction and Development
Don’t expect new construction to have a big impact on demand this summer – or the rest of this year, for that matter. “They’re building houses at a pretty fair clip, the problem is they can’t get them finished,” Fleming says.
Continued supply chain issues in building materials and appliances mean home construction faces holdups in the process, and completion is delayed often.
Though homebuilder confidence started the year strong, it has since dropped, according to the Housing Market Index by the National Association of Home Builders and Wells Fargo, which asks builders across the U.S. how they feel about sales of new single-family houses currently, in the next six months and the traffic of prospective buyers. Preliminary numbers for May reveal builders feel the least confident about the traffic of prospective buyers, which is rated at 52 out of 100, while confidence for single-family sales in the present is at 78.
Similar feelings are reflected in the LegalShield Economic Stress Index, which shows movement for construction dropping over the last year. Layton connects the drop in buyer activity for a new home with the decreased affordability, caused by rising interest rates, rising prices and potentially higher costs of building materials.
“We are beginning to see the consumer pull back and say, ‘I’m not going to buy that house right now,’” Layton says.
Renting
Like home prices in the last year, rents have also climbed rapidly in much of the U.S. Rental information company Zumper reports in its May National Rent Index that rents, on a national scale, hit an all-time high in May, with one-bedroom apartments up 12.8% year over year and two-bedroom apartments up 13.9% year over year. However, the month-over-month growth, at just 0.3% for a one-bedroom and 0.7% for a two-bedroom, could be a sign of softening.
“With home sales starting to slow thanks to rising interest rates and increasing inventory, May’s slightly cooler rent increases could foreshadow a less frantic rental market,” said Jeff Andrews, senior economic analyst for Zumper, in a press release.
Though, the report notes that rents aren’t expecting to see any significant decline – and while home prices have reached an affordability wall, rents in many markets still have a ways to go before reaching the same point.
Rent is one of those areas that often impacts consumers early on, according to Layton. And as financial pressure mounts, higher rents could become a problem. “We’re beginning to see stress on the everyday consumer. We’re also beginning to see record high landlord-tenant intake,” Layton says.
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There are plenty of scenarios that make selling your home necessary – whether it’s to move across the country to be closer to family, because you need to downsize or you can’t afford mortgage payments anymore.
But when your timeline to move is flexible, you likely want to try to strategize over when and how you place your home on the market to find buyers, maximize profit and make it easier to buy a new home, if that’s what you’re doing next.
Thus far in 2023, homeowners have experienced a different market than they witnessed in the early years of the pandemic with rapidly rising home prices, with higher interest rates since 2022 still tempering demand somewhat. While the latter half of 2023 may see a recession, mortgage interest rates are expected to stabilize and some buyers may be able to return to the market with renewed buying power. Buyers who have been in their homes for at least a few years can expect to see that their property value has grown – though it may look less thrilling than the peaks of 2021.
If you’re on the fence about selling, you have a few choices: You can put your house up for sale to take advantage of current low inventory, you can wait to see how interest rates and inflation play out as they relate to housing or you can opt to stay in your current home for the foreseeable future.
Here are three reasons you shouldn’t sell your home in 2023, along with three reasons it’s a good idea to make the jump in the next 12 months:
If you’re one of the many homeowners who have moved or refinanced in the last few years, there’s no reason to consider selling your home in the immediate future. Hopefully, your mortgage has helped ease any financial woes with low monthly payments.
Ahead of 2022, many homeowners were able to lock into mortgage rates below 3%, which makes selling any time in the near future far less attractive. Unless other factors are making a move necessary, enjoy the low interest rate you locked in and continue to build equity in your home.
Mortgage rates have risen and dropped many times during the first half of 2023, but have remained below the peak of 7.08% for a 30-year, fixed-rate mortgage in November 2022, according to Freddie Mac. As of June 15, Freddie Mac reported the average interest rate for a 30-year, fixed-rate mortgage was 6.69%.
But if you managed to secure an interest rate below 3% – or even 2%, for some homeowners – you’ll see little incentive to more than triple your interest rate for a new home.
You won’t be the only homeowner feeling locked into your property based on mortgage rates. “That’s likely to keep a lid on how much inventory growth we’re going to see,” says Danielle Hale, chief economist for Realtor.com.
Over the course of the last couple of years, worries about affording your next home purchase were tied to the housing market’s rising prices and lack of new homes for sale. Now, add interest rates between 6% and 7% to the mix, and there seems to be little financial benefit to buying a new home. Don’t be afraid to wait to sell your home if you think the timing isn’t right.
Even with plenty of home equity, you may find that your buying power is diminished when you factor in how much more you would have to pay toward interest each month.
“That’s a tough financial calculus, and that’s keeping the more discretionary sellers out of the market right now,” says Lisa Sturtevant, chief economist for multiple listing service Bright MLS.
If you can’t afford the home you would want to have next, it makes sense to wait to put your house on the market.
The market is more balanced than it was in 2021 or even in the first half of 2022, but housing inventory still remains low. Plenty of other homeowners are opting not to list their home for the time being, and while there are fewer buyers than there were in the peak of the coronavirus pandemic, more are coming back to the market than you may expect.
“In the spring of this year we saw buyers come back. Newly pending listings have ticked up,” says Orphe Divounguy, senior economist for Zillow.
Shopping for a new home is still easier than it was in 2021 because you’re less likely to have to compete with as many multiple offers and bids well above the asking price. But there were more than 24% fewer new listings in May 2023 compared with May 2022, according to Zillow. With fewer homes on the market to choose from, you may struggle to find the right number of bedrooms, ideal location or overall feel that will make you willing to take on a higher interest rate.
“The market’s still very competitive,” Divounguy says.
Mortgage rates reached higher levels in 2022 than in recent memory. For many homeowners, that’s enough to opt to stay in their current house. For others, the interest rate isn’t as much of a concern.
“There may be buyers that are not as rate sensitive,” says Mike Reynolds, vice president of investment strategy at Glenmede, a Philadelphia-based wealth management firm. You may be a cash buyer without plans to finance your next house at all, or you may have enough equity in your current home to feel confident you can buy down your next mortgage rate to a more attractive level.
The more prolonged period of interest rates above 6% has also given many would-be homebuyers the opportunity to adjust to the prospect of higher mortgage costs – it may require an adjusted budget, but it doesn’t necessarily mean you can’t make a purchase.
“Buyers seem to be OK with the idea that 7% is the norm, not the exception,” Divounguy says.
Plus, at the end of the day there is no way to perfectly time the market. If you can afford to move and want to move, selling your home in 2023 may be the best timing when there’s no way to know what’s ahead in 2024 and beyond.
Many housing markets across the U.S. are still seeing plenty of buyer interest, but properties aren’t getting the regular bidding wars and sky-high sale prices they were in 2021. If you sell your home in 2023, buyers will be less inclined to offer above the asking price – and they may not look at all if the asking price is too much.
Divounguy explains that the houses selling fast today and receiving more than one offer are those that are priced to sell and offer all the marketing bells and whistles, like a 3D home tour and professional photography.
Unless your real estate agent says otherwise based on recent sales in your area, you’re unlikely to get $100,000 above the asking price for your starter home without an appraisal contingency. With buyers looking carefully at their budgets, they’ll be making serious offers based on what makes sense for their budget and what they believe your home is worth.
If you need to move for any reason, it’s still possible to sell your home and find a new one. If you lost your job, you may be worried about your ability to continue to pay your mortgage. If that’s the case, selling may be a valid option. But plenty of others are opting for a life change that involves moving to another state, more room for a growing family or a bigger footprint needed for permanent work-from-home space.
A profitable sale and purchase of a new home is still possible – but proper preparation and realistic expectations are key.
Additionally, change in conditions can open doors for buyers to come back to the market – particularly if mortgage interest rates shift down further and if inflation continues to decline. If a recession occurs in the latter half of 2023 as experts predict, a drop in mortgage rates could help buyers get back in the market.
However, don’t expect the Federal Reserve to be too eager to drop rates suddenly in the event of an economic downturn. While mortgage interest rates are technically independent of the Fed’s funds rate, they often reflect changes. “The Fed’s going to be very careful not to reignite inflation that has become very sticky,” says Reynolds, who anticipates mortgage rates to remain on the high end where they’ve been through the end of the year.
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