What Did Analysts Expect From Mortgage Rates and Home Prices in 2023?

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Welcome to 2023

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I'm the Mortgage Mom, and this is our first show of 2023. I hope you all had wonderful holidays — I definitely did not. I had COVID, and it was not a fun week between Christmas and New Year's. So you haven't seen me for a while, but we're in a new year.

Everybody has been asking what's going to happen this year. We've got tons of buyers who have been sitting on the sidelines, waiting to get through the holidays, wondering whether they should buy this year or wait, whether their property value is going to drop. So I want to focus on all of that: exactly where we're at, what I'm reading, what I'm seeing, what I'm hearing.

I found a fabulous article that has quite a few different analysts in it, all with different opinions. We're going to go through those and then sum it up. Should you be buying this year? Is 2023 your year to become a homeowner? Should you be looking at a refinance? What happens to your property value, and are you better off getting cash out now rather than later?

Where we're coming from

2022 was not a fabulous year for everybody. The rate hikes were crazy — mortgage rates more than doubled from the beginning of 2022 to the end. Is that going to continue? That's what we're discussing today.

What about property values? In my personal opinion I do think they'll come down some. Rates have actually come down a little from where they peaked in 2022, which makes right now good timing for anybody who has been thinking about purchasing or refinancing. Take advantage while we've got this dip, because I don't think it's going to last long.

The source

I'm going to give credit where it's due. This is from Bankrate, written by Eric J. Martin, published January 3, 2023, and you can go read it yourself on their website. I read constantly — this is my industry, I have to stay on top of it — and this was one of the best articles I've read in a long time, because the writer named every analyst he pulled information from. That matters. It lets you decide for yourself whether you believe what you're hearing.

At the time of writing, the average 30-year fixed-rate mortgage was 6.63%. Keep in mind that's an average assuming you're not paying points. Every loan program prices a little differently — conventional rates run a bit higher than government rates like VA and FHA — and a lot of buyers and homeowners right now are paying points to buy the rate down. We're closing loans in the fives: 5.5, 5.875, under six percent.

The inflation rate was 7.1%, which the article calls alarming. I want to say something about that: it had been higher, and I was worried it was heading toward eight. So although 7.1% is really high and concerning, we have stopped rising and we have started to decline. In my opinion we're headed in the right direction. We have a lot of work to do, but I see recovery on the horizon.

The article also notes that sales of previously owned homes dropped 7.7% in November, to a seasonally adjusted annual rate of 4.09 million units, per the National Association of Realtors — the slowest pace observed in ten years. That means homes stay on the market longer and fewer change hands. We're in a slow period.

How long can you actually wait?

I'll tell you right now that I believe 2023 ends with rates higher than where we are today. So if you've been thinking about taking cash out, or doing a refinance of any kind, you want to make that call now.

I've said this all the way through 2020, 2021 and 2022: stop the bleeding. If you've been thinking about doing something, pick up the phone and get it started. A lot of my clients are in disbelief that something is going to change and rates are going to drop out of nowhere, so they think they should just wait. The question is: how long can you wait? If you need cash out for an addition, home improvement, or to pay off debt — can you wait 18 months? Can you wait 24? By the end of this article I think you'll have the same feeling I do, which is that it isn't changing this year. Everybody's situation is different and only you can answer that. But if you've already been waiting six months or a year, you're likely waiting at least another 18 to 24.

Q&A: rolling a second into a first

Heather asks: “What are your thoughts for people who have taken out a HELOC or a home equity loan over the past year, refinancing it into just a first?”

I think it's actually a really good time for people to do that, and it depends on how much they took out in that second lien. If you have a million-dollar mortgage at 3% and you took a $100,000 second, it's probably not a good idea to refinance and combine everything. But if you have a $400,000 mortgage and you took out $100,000 or $150,000, you're starting to approach the territory where you'd end up with a better blended rate by refinancing both debts into one. If you have a second mortgage — a home equity line or a home equity loan — and you're thinking about rolling it all together, don't wait. We're lower right now than the peaks of 2022, and we're probably moving higher in the near future. Let's run that blended rate calculator and see where you are.

Will mortgage rates keep climbing?

The article's first question is whether the cost of financing a home comes down this year. Some say no: continued inflation, higher interest rates overall, a potential recession and geopolitical tensions push 30-year and 15-year rates up throughout 2023, and bring the two closer together as short-term risks rise. That forecaster expects rates to climb at least one to one and a half percent through 2023.

Then there's Robert Johnson, a professor of finance at Creighton University's Heider College of Business. By the end of 2023, he says, financial market participants expect the Fed will have increased the target Fed funds rate by 175 to 200 basis points from current levels — and a hundred basis points is one percent, so that's 1.75 to 2 full points. That would translate into 30-year and 15-year mortgage rates at roughly eight and a half and 7.7 percent. Remember, the article started with a 6.63% average, which had been holding fairly steady for a couple of weeks.

Rick Sharga, executive vice president of market intelligence at ATTOM Data Solutions, which analyzes real estate and property data, is more hopeful. He says rates peak at about 8% and 7.25% for the 30 and the 15 year, then gradually come down over the course of the year to hang somewhere around 6% and 5.25% respectively. This is entirely dependent, he says, on the Federal Reserve's ability to get inflation under control and ease up on its aggressive rate increases.

So we now have two people, from completely different places doing different analysis, both expecting rates to go up. One says as high as eight and a half; the other says the 30-year settles around seven and a quarter by year end. You've got a range — but the general direction is up. And that reinforces what I said at the top: if you've been thinking about refinancing, get something locked in now.

One thing I liked about December: the Fed raised by a half point instead of the three quarters they'd done five times before. They must be feeling the difference, because inflation stopped climbing and started to trickle down. In my last show of 2022 I said I was really hoping the next increase would be a quarter, and maybe the one after that they leave it alone. After reading this article and others while I was laying in bed sick, I actually think we're going to see more rate increases than I'd said in that show.

Three scenarios for 2023

Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors, envisions three different rate scenarios — which I understand, because nobody has a crystal ball.

Scenario one: inflation remains high, forcing the Fed to raise repeatedly, and mortgage rates keep climbing, possibly near 8.5%. Scenario two: the Consumer Price Index responds more to the Fed's hikes, inflation decelerates gradually, and mortgage rates stabilize near 7% to 7.5% in 2023. Scenario three: the Fed raises repeatedly to curb inflation, the economy falls into a recession, and that could cause rates to drop to 5%.

Let's talk about those. Scenario one means higher rates by year end — so if you've been thinking about doing something, do it now. Scenario two means higher rates by year end — so get it started now. Scenario three is the one people are secretly rooting for: a recession, rates cut to pull us out, home prices down. But ask yourself what that actually looks like if you've been sitting on the fence waiting for it. Are you prepared to go up against all-cash buyers? The crazy negotiation, the overbidding, the multiple offers, the shortened terms, having to waive your inspection rights and your appraisal rights? That's everything we saw in 2020 and 2021. So even in scenario three — do something now.

Will home sales decline?

Each of those three scenarios has a major impact on sales, and in each case sales are down; it's a question of how much. Higher rates under scenario one could cause home sales to drop more than 10% this year. Under scenario two, sales drop 7% to 8%. Under the third scenario, activity may drop more than 15%.

I actually disagree with that last one. In my 29th year in this business, my view is that if values come down about 10% — which is my prediction for 2023 — and we do fall into a recession and they drop rates to about 5% to recover the economy, we're going to see home sales spike and get a little crazy. That's my opinion. You get to draw your own from the same data.

The other experts agree the slowdown continues into 2023. Sharga believes the number of sales keeps slowing, likely hovering in the four and a half million range, with new home sales around 600,000. Listings may no longer go at a lightning-fast pace either — days on market have been climbing back toward normal and could approach 30 days or more as the market cools.

So my prediction: by the end of 2023, about a 10% drop in housing value. Homes are no longer selling overnight or before they hit the MLS. If you're thinking about selling, anticipate 30 to 60 days on the market before you get a good offer and enter escrow. That is not a crash. That's normal, and people just aren't used to it anymore.

Will prices fall?

Here's where it gets interesting. Evangelou predicts that due to low inventory, home prices won't drop in 2023 — she expects pricing relatively flat, increasing by one percentage point. So: no decline, no real appreciation.

Johnson feels higher rates will undoubtedly hurt home values, producing a soft real estate market with prices lower than current levels. He doesn't put a number on it. That's not great news for sellers, but welcome news for house hunters.

The article also quotes a partner at a Manhattan real estate law firm, who notes there are plenty of potential buyers patiently waiting to enter the market. Assuming home prices ease, you'll start to see some of them emerge — especially the all-cash or low loan-to-value purchasers, who are less impacted by rate concerns.

And that is exactly my warning. Those are the buyers who will take advantage of sellers who've been sitting 30 to 60 days and are desperate. People are getting fantastic deals right now — I'm seeing $20,000 and $30,000 credits from sellers to help buyers buy down rates. When the all-cash and big-down-payment buyers come back, that window closes for you.

Sharga says home values on a national level are almost certain to decline at least modestly, perhaps between 5% and 10%. Some of the more expensive markets could see larger declines — but limited inventory, strong credit quality among current mortgage holders, and demand from young adults looking to become homeowners should help prevent prices from falling further. And that's the part I want you to hear. There is an arsenal of people who want to buy homes and haven't yet: young families, people just getting married, just out of college, just starting careers. When the tides turn it is going to be a jungle. So even though rates are high, this is the year to get yourself a really good deal, secure the property, and refinance later when rates drop.

Buyer's market or seller's market?

Greg McBride, chief financial analyst for Bankrate, says affordability issues and economic worries will depress buyer demand, and inventory available for sale will remain limited.

Think about what that means. If somebody already owns their home and locked a really low rate in 2020, 2021 or early 2022, the chance of them listing it — even worried that values might dip — is very slim, because the payment they have is far better than anything they could get by buying again. That keeps inventory low even with high rates and less buyer demand.

So buyers may think we're in a buyer's market and sellers may think we're in a seller's market. I agree with this one completely: it continues to be more of a balanced market than tilting one way or the other. If you need to buy, you're going to buy. If you need to sell, you're going to sell. Inventory stays low, which helps keep prices from falling drastically, and rates are probably higher by year end.

Another analyst declined to predict nationally at all, saying leverage varies depending on the type of market — some pockets do well, others hold steady. And Johnson, on the other hand, anticipates sellers holding fewer cards in 2024, as many reluctant sellers — the ones waiting for the market to turn around — capitulate and add to housing supply. Which is exactly what I'm trying to tell you: I think 2024 looks good, and if you've been thinking about buying, capture it this year, earlier rather than later, to keep your rate as low as possible.

Will inventory increase?

Experts differ. Here's the number I want you to hear: before the housing crash of 2008, inventory peaked at about a 13-month supply — twice what you'd see in a healthy market. Today we have about a three-month supply, roughly half of what we need. That is the opposite of 2008. We have very limited inventory.

Eric asks: “Are there many short-term rental homes that may hit the market, creating more inventory?” There very well could be, Eric — but personally I don't think there are enough short-term rentals to change or sway the entire nation. In an area that's heavily Airbnb or VRBO — say Lake Havasu City, where I'd guess a large share of the city is short-term rentals — if a lot of those owners decide to sell, yes. That's exactly what one of the analysts meant about it changing based on pockets and markets. But in a normal suburban neighborhood, I don't think there are enough of them to sway the general outlook.

Back to the article: current homeowners are unlikely to trade a 3% loan for a 7% one unless they absolutely have to, so existing home inventory should remain low. And builders have scaled back on housing starts for the past three months, so we're not likely to see a big boost in supply from new construction either.

Heather and I were talking about this about a month ago — we were watching the building permits new builders were pulling, which they typically do about a year before construction starts, and those had dropped dramatically. Heather has the numbers: last month, new home building in California had dropped about 29%. The largest decline was Texas, then Florida, then California. So in the three biggest states you aren't going to see as many new builds going up, which means more buyers looking at resales, with less inventory because owners aren't selling. That's what stops a massive bleed in property values — again, my opinion.

Will homes be more affordable?

McBride: if inflation pressures ease and we see a meaningful pullback in mortgage rates this year, that eases some of the strain on buyers — but only a bit. Prices remain fairly steady, and in a lot of markets that's a price 40% or more above pre-pandemic levels. Home prices will not fall proportionally.

Another forecaster's take: any fall in prices won't be enough to offset the rising interest rate and its contribution to the monthly payment. Johnson agrees. The impact of higher rates and lower prices in 2023 will likely cancel each other out to a great extent, so overall affordability won't change dramatically.

So if you've put buying on hold thinking there's going to be a massive crash and rates are going to come back down and you'll execute in that window — if you're genuinely prepared to sit and wait two, three, four years, fine. But if you're not, move on with your life. Start your search, figure out what you can afford, get into a home. The sooner you do, the better the rate you'll get, and if rates drop later you can always refinance to lower the payment.

And ask what a 10% decline really means. When the market turns and you're back in a bidding war, going over list price, trying to beat out other buyers on the same house — what is 10% in the scheme of things? Meanwhile you've secured a home, you have a tax write-off, you own property, you have security. When values go up, yours goes up with them. So negotiate while it's easy, while there are fewer buyers, get yourself a fantastic deal, and refinance later. That's my opinion of the day.

Check your home equity line

If you took a home equity line of credit in 2021 or 2022 and your rate is now approaching nine, ten, or eleven percent — and it's only going to keep going as the Fed keeps increasing — look at it. You thought you took a line at seven percent. Get online and check. It's probably not seven percent anymore. You could easily be paying nine, ten, eleven, twelve.

If you owe $100,000, $150,000 or $200,000 on that line at twelve percent, even if your current mortgage is at three percent, what are you actually paying in blended terms across both? If you have a big mortgage and a little line, big deal — leave it alone. But if you've got a decent-sized mortgage and a decent-sized line, maybe we get you into a rate in the fives on a refinance and consolidate everything, and then refinance again when rates turn in the next couple of years.

There's a timing element too. A refinance is based on the value of your home. If your property value drops and you still owe the same amount — which you will, because monthly payments don't pay a balance down quickly — it gets harder to refinance, and you may not have enough equity to pull the cash you were hoping for. As values drop, that door narrows.

And if it doesn't make sense, we are going to tell you to do nothing. That's what's great about my team. We are not here to push you into a program or originate a loan that doesn't make sense for you. I'm very strict about that throughout my entire office. That is not the reputation we want and not the reputation we will ever have. We give you the information, we show you the math, and we let you make the decision.

The bottom line on 2023

Most of the pros are in consensus on something of a transitional year characterized by uncertainty. McBride predicts the market will be tepid in 2023, with lukewarm demand and limited inventory available for sale — though rates could pull back meaningfully if inflation pressures ease. The hope is that supply and demand normalize and rates can start to come back to earth. Until that happens, those who can't afford the cost of borrowed money will have to keep waiting, and those holding out hope that rates drop soon may have to accept that the low-rate financing windows of 2020 and 2021 have closed. And with more homeowners staying put, we might see an uptick in home equity loans and lines over the course of the year. In other words: if moving is out, remodeling is in.

Let me sum it up. Rates have a nice small drop right now, lower than the 2022 peak. Most analysts agree that by the end of 2023 rates will be higher than they are today. If you've been thinking about refinancing to do home improvements — because you've decided staying is better than selling and moving into something bigger — think about doing that financing today, whether that's a refinance, a home equity line, or a home equity loan, because if values drop that opportunity could go away.

And home buyers: if you've been waiting for a massive decline in values and a drop in rates, things probably aren't just going to flip. Your chances of negotiating with a seller right now, with lower buyer demand, are much better. The homes on the market are there because those people need to sell — relocation, a growing family, something changed. Fewer homes, fewer willing buyers, and your chances of negotiating a great price are really good. Don't wait until the last quarter of 2023 to decide you'll buy in 2024 when rates come down and values have bottomed — because if you're a first-time buyer with a low or zero down payment who needs closing cost credits from a seller, it is going to be very difficult to compete against all-cash and big-down-payment buyers.

That sums up today's show. I went way longer than usual. Please reach out to the office for anything you need — 844-935-3634, that's 844-WE-LEND-4 — and to know when we go live, text the word MOM to that same number and you'll get one link a week. I hope you guys have a great one, and we'll see you next Wednesday. Bye-bye.