On Real Estate & More – February 2023

If you have looked at the news recently, forecasts for the real estate market suggest that things could be very different in 2023 compared to what we became used to the past several years. The biggest change has to do with the overall pace of the real estate market. It’s taking longer to sell a home these days, partly due to higher home values and mortgage rates. Matthew Gardener, Windermere’s real estate economist, recently provided his predictions for the Oregon housing market in 2023. The following is a summary of his predictions:

There Is No Housing Bubble—Mortgage rates rose steeply in 2022 which, when coupled with the massive run-up in home prices, has some suggesting that we are recreating the housing bubble of 2007. But that could not be further from the truth. Over the past couple of years, home prices got ahead of themselves due to a perfect storm of massive pandemic-induced demand and historically-low mortgage rates. While Matthew expects year-over-year price declines in 2023, he does not believe there will be a systemic drop in home values. Furthermore, as financing costs start to pull back in 2023, he expects that will allow prices to resume their long-term average pace of growth.

Mortgage Rates Will Drop—Mortgage rates started to skyrocket at the start of 2022 as the Federal Reserve announced their intent to address inflation. While the Fed doesn’t control mortgage rates, they can influence them, which we saw with the 30-year rate rising from 3.2% in early 2022 to over 7% by October. Their efforts so far have yet to significantly reduce inflation, but they have increased the likelihood of a recession in 2023. Therefore, early in the year Matthew expects the Fed to start pulling back from their aggressive policy stance, and this will allow rates to begin slowly stabilizing. Rates will likely remain above 6% until the fall of 2023 when they should dip into the high 5% range.

Don’t Expect Inventory to Grow Significantly—Although inventory levels rose in 2022, they are still well below their long-term average. In 2023 Matthew doesn’t expect a significant increase in the number of homes for sale, as many homeowners do not want to lose their low mortgage rate.

No Buyer’s Market but a More Balanced One—With supply levels expected to remain well below normal, it’s unlikely that we will see a buyer’s market in 2023. A buyer’s market is usually defined as having more than six months of available inventory, and the last time we reached that level was in 2012 when we were recovering from the housing bubble. To get to six months of inventory, we would have to reach two million listings, which hasn’t happened since 2015. In addition, monthly sales would have to drop below 325,000, a number we haven’t seen in over a decade.

Sellers Will Have to Become More Realistic—We all know that home sellers have had the upper hand for several years, but those days are behind us. That said, while the market has slowed, there are still buyers out there. The difference now is that higher mortgage rates and lower affordability are limiting how much buyers can pay for a home. Because of this, Matthew expects listing prices to pull back further in the coming year, which will make accurate pricing more important than ever when selling a home.

Workers Return to Work (Sort of)—The pandemic’s impact on where many people could work was profound, as it allowed buyers to look further away from their workplaces and into more affordable markets. Many businesses are still determining their long-term work-from-home policies, but in the coming year Matthew expects there will be more clarity for workers. This could be the catalyst for those who have been waiting to buy until they know how often they’re expected to work at the office.

New Construction Activity Is Unlikely to Increase—Permits for new home construction are down by over 17% year over year, as are new home starts. Matthew predicts that builders will pull back further in 2023. Builders will start seeing some easing in the supply chain issues that hit them hard over the past two years, but development costs will still be high. Trying to balance homebuilding costs with what a consumer can pay (given higher mortgage rates) will likely lead builders to slow activity.

Not All Markets Are Created Equal—Markets where home price growth rose the fastest in recent years are expected to experience a disproportionate swing to the downside. For example, markets in areas that had an influx of remote workers, who flocked to cheaper housing during the pandemic, will likely see prices fall by a greater percentage than other parts of the country. That said, even those markets will start to see prices stabilize by the end of 2023 and resume a more reasonable pace of price growth.

Affordability Will Continue to Be a Major Issue—In most markets, home prices will not increase in 2023, but any price drop will not be enough to make housing more affordable. And with mortgage rates remaining higher than they’ve been in over a decade, affordability will continue to be a problem in the coming year, which is a concerning outlook for first-time buyers. With both prices and mortgage rates spiraling upward in 2022, it’s likely that many renters are now in a situation where the dream of homeownership has gone. That’s not to say they will never be able to buy a home, just that they may have to wait a lot longer than they had hoped.