Every January, the real estate industry is flooded with professionals waxing eloquent on predictions for the year ahead.
Some economists put out bold predictions. Other experts take a more cautious approach. From us, you will find a mixture of both, with the full intention of helping you put your best foot forward in 2023. Below we have compiled 15 key areas to pay attention to as the year progresses.
Prediction 1: Inflation has likely peaked
It is currently at 7.1%, down from 9.1% last year.
The Consumer Price Index (CPI) rose by 6.5% last month, year over year. This was the smallest twelve-month increase since the fourth quarter of 2021. As a result, inflation slowed for the sixth straight month.
After many months of inflation last year, some relief is now being felt as the supply-chain, Covid-related issues begin to wane, however, it’s not a consistent story over all products and services. Some things are up, some are coming down. Again, this is the year of adjustment.
For example: Through November 2022, many major electronics got cheaper: Smartphone prices plunged 23.4%, TV prices dropped 17% and computers got 4.4% less expensive. The price of major appliances fell by 1%. The price of clothing rose, but only by 3.6%. Sporting goods are up by 2.7%, but toys are only up by 0.6%.
Even with price increases, consumers do have control over many of these purchases and are simply making different choices, using coupons or just buying fewer things.
Prediction 2: Rental demand will remain high, and rents will continue to increase
Monthly rental price increases are still happening but at a slower percentage increase. The higher mortgage rates have affected first-time buyers and low downpayment buyers first, thus fueling the demand for rentals.
Prediction 3: Interest rates are expected to normalize
“The mortgage market began 2023 on a positive note, with a decline in mortgage rates leading to an uptick in refinance applications. Purchase activity was down again on a weekly and annual basis,” Bob Broeksmit, Mortgage Bankers Association (MBA) president and CEO, said in a statement.
Broeksmit stated that the MBA expects mortgage rates to steadily move lower in 2023, bringing more buyers back to the market. He expects the 30-year fixed rate to be around 5.2% by the end of the year.
Keeping things in perspective, Tad Dahlke, who runs the California-based mortgage trading business RAMS, wrote in a commentary to clients that the average mortgage rate has been 7.38% in the past 40 years, 4.53% over 20 years, and 3.36% in the last three years. 5.2% is still below the average and feels pretty good after peaking at over 7% last year.
Prediction 4: There will be more creative mortgages
For example, a buydown mortgage allows buyers to have a lower rate initially, which both qualifies them for more homes and keeps their payment lower for the first few years of the loan.
• 1-0 Buydown: Buyer enjoys a 1% reduction in the interest rate during the first year of the loan.
• 2-1 Buydown: Buyer enjoys a 2% reduction in the interest rate during the first year and a 1% reduction during the second year of the loan.
• 3-2-1 Buydown: Buyer enjoys a 3% reduction in year one, 2% in year two, and 1% in year three.
Once the rate adjusts, the buyer will then have a higher rate locked in, but they can refinance or sell in the meantime if necessary. The upfront cost of the rate buydown can be paid by the seller if negotiated into the contract.
Prediction 5: There could be a credit crisis
The average interest rate on consumer debt is 19.1%. If inflation ramps back up or unemployment increases significantly, consumers may default on credit cards.
That would be bad for housing since potential buyers could have their credit scores affected as well as their ratios as a result of carrying more debt.
This is something to watch.
Prediction 6: Number of sales will certainly be lower
The MBA predicts 15% fewer loan applications in 2023, mainly from first-time buyers checking out of the market.
Home sales are predicted to be roughly 4.5 million in 2023, with 600,000 of those being new construction.
There were 6.1 million home sales in 2021 and 5.9 million in 2022.
If we see more inventory, better interest rates, and more moderate pricing, buyers will return at a faster clip, potentially recharging the market.
This is something to watch. Forecasts vary widely regarding how many fewer sales there will be, but everyone agrees there WILL be fewer.
Keep in mind that if we drop to 4.5 million sales, that’s still 9 million paid commissions and doesn’t account for all new construction or private transactions. How many homes do YOU have to sell to meet or exceed your goals this year?
Remember, it only takes selling 15 homes per year to gross $150,000, figuring an average sale price of $400,000 and 20% expenses. Only a few years ago it would have taken 25 home sales to make the same money, and assuming you’re a proactive lead generator, you have the power to increase your average sale price.
Many of the missing home sales this year will be due to fewer first-time buyers, so concentrate on move-up buyers and downsizers and you’re less likely to feel the impact.
Prediction 7: Inventory will modestly increase
This will be mainly due to lingering listings, not due to more new construction or distressed property.
Prediction 8: Prices will stabilize but not fall
The best homes (priced right for the amenities, condition, and neighborhood) are still seeing multiple offers, though sometimes after several weekends on the market.
Prices are stabilizing. The average year-over-year increase for 2022 settled in at 10% countrywide.
Supply and demand still prevail. There is currently a three-month supply, which is still only half of what it would take for the market to be ‘balanced.’
Caution: There’s a difference between price reductions and price depreciation. There are virtually no ‘upside down’ homeowners in today’s market. Watch closed prices to see what’s really happening.
Prediction 9: Sellers will have different motivations than in the pandemic years
Sellers who don’t have to move won’t be moving. The most common sellers will be: Homeowners downsizing, empty-nesters selling the family home, people moving to get more space, families looking for better schools…etc.
‘Normal’ reasons to move will prevail.
Prediction 10: Commissions will rise
With longer days on the market, fewer bidding wars, and more competition, sellers are already valuing caring, competent and skilled agents more than ever.
Prediction 11: Buyers will be pickier
Expect them to longer to make a decision and look for the ‘right’ house, not just a house that’s available. Buyers do have more power in the negotiation, but it’s not yet a buyer’s market.
Prediction 12: There will be no housing crash
- Low inventory
- High demand
- Creative mortgages
- Nearly zero distressed with no impetus for that to change
- Super low rates locked in, suppressing many moves
- Millennials and Gen Z who have yet to purchase
- New Americans who desire homeownership
- Single greatest store of wealth, the American Dream
- Very high equity, unlikely to be upside-down loans.
- High lending standards
- Simple supply and demand equation
Prediction 13: Unemployment could drive a recession and change everything
The Federal Reserve has been doing its best to try to slow the economy and cool down inflation. It seems to be working thus far, but the job market may slow more quickly and kick off a recession.
Morgan Stanley predicts that a recession is less likely, but Bank of America says it’s ‘very likely.’
This is one that is hard to predict, but we use our own observations, as should you to read the tea leaves. The current rate of unemployment is just 3.7%, which is a historic low.
That said, some economists are warning that the job market will become more unstable in 2023. Barclays expects the unemployment rate to get to about 5% or a loss of about a million jobs.
Meanwhile, other economists from JP Morgan to Goldman Sachs are all predicting between zero recession and a modest, short recession. In other words, it seems that no one knows for sure.
It feels like no recession to us so far. Even if there is a recession, that could be good for housing in the sense that it may drive more inventory, which we still need to get to a more balanced market.
Prediction 14: Social media will continue to replace more traditional marketing practices
According to the National Association of Realtors (NAR), 70% of real estate professionals are already using video in their social media.
Also according to NAR, 41% are using social media in an attempt to lead generate, to varying degrees of success.
Remember, your media needs to be quality content, providing value and a call to action that is specific to your market, and specifically about buying or selling real estate!
Prediction 15: Artificial Intelligence (AI) will become an amazing tool for your real estate practice
This is the topic of our next podcast series, so stay tuned!
Tim and Julie Harris host a podcast for Realtors called Real Estate Coaching Radio. They’ve been professional real estate coaches for more than 20 years, helping agents succeed in many different market conditions.