Many people have strong opinions about how the real estate market will do in 2023. Market crashes are always popular on the news sites and get clicks regardless of the market cycle.
However with the cooling economy, high home prices and rising interest rates, the risk of prices going down and a market crash have increased significantly. Here are some opinions on the subject:
Lawrence Yun, Chief Economist at NAR, explains home prices will vary by local area, but will net neutral nationwide as the market continues to adjust:
“After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”
Mark Fleming, Chief Economist at First American, says:
“The housing market, once adjusted to the new normal of higher mortgage rates, will benefit from continued strong demographic-driven demand relative to an overall, long-run shortage of supply.”
The California Association of Realtors recently released their housing market forecast report for 2023:
“California’s median home price is forecast to decline 8.8 percent in 2023, following a projected 5.7 percent increase in 2022. The average for 30-year, fixed mortgage interest rates will stay elevated at 6.6 percent in 2023, up from 5.2 percent in 2022 and from 3.0 percent in 2021 but will remain relatively low by historical standards.”
Ken McElroyi, Author ABC’s of Real Estate and
“The cost of debt is the biggest issue now… we have already seen significant drops in residential and commercial real estate in the past 6 months… The main thing will be cashflow. This is the number one thing, if the cashflow is there people can ride it out. If tenants lose their jobs, the owner could lose their property.”
The recent boom was fueled by low inventory and historically low interest rates.
Interest rates have gone up significantly back to ‘normal’ rates this rapid jump has scared many buyers out of the market.
While interest rates spiked, housing prices have flattened and started to decrease in some areas. Listings are sitting much longer and overall sales (turnover) has dropped significantly.
In comparison to one of the hottest markets in history, many people see price cuts, longer days on market and think the market is crashing.
Is this a normal market correction or a crash?
California housing is unaffordable. In Q2 of 2022 affordability for Los Angeles was at 17%. This means roughly 17% of people could afford to buy a house.
This is near the peak of the last 2 market corrections. Prices have started going down. However this is down from the peak of a red hot market.
Interest rates have started trending slightly down lately. In Q3 we had 19% affordability which is a 2% increase from the 17% of Q2.
It appears that inflation is cooling and mortgage rates originally increased aggressively factoring in a long period of the Fed increasing rates.
Interest rates are now trending down, the market has built in expectations of the Fed continuing to raise rates in throughout 2023.
83% of homeowners have a mortgage rate at 4% or below. Another 16% have a rate under 5%! This means 99% of homeowners have a mortgage rate of under 5%.
This has locked many seller’s into their current home. They have a low interest rate and don’t want a new rate that starts with a 5 or 6.
Also in California we have Prop 19. Prop 19 keeps taxes low and they can only be increased 2% a year. A homeowner that refinanced last year could face a significantly higher taxes, and a higher mortgage if they decide to move.
This seller lock in effect is keeping inventory low.
A California market cannot crash without significant increase in inventory and homeowners that must sell.
While prices have cooled off since the covid driven market frenzy, we need a factor other than high prices for significant price damage.
In order to have a market crash, we need a combination of high unemployment, a major recession and/or foreclosures to increase supply.
It’s unlikely we still see a huge wave of foreclosures like we did in 2008, especially in California.
Banks have programs in place to restructure loans, California has many programs to help homeowners and unless they bought it in 2022, they most likely have equity that will allow them to sell at market rates or restructure the loan to keep the house.
The market has already shifted and we could have seen the bottom in 2022. However that depends on the Fed, the economy, unemployment, etc.
What do you think is going to happen?