It's official, 2022 will end, and 2023 will be upon us. For many in the real estate market, the closing of 2022 could not come fast enough. After all, attempting to understand where the market was going and why had about the same odds as flipping a coin.
Every day was a new adventure of figuring out what was happening. The jobs report was strong, recession fears subsided, and then inflation showed up, and another rate hike came, sending fear through markets. Then the next day, real estate inventory would stabilize and even decline in some markets, and prices would fail to hit free-fall status, pumping positivity back in. Throw in global market disruptions, war in Ukraine, sanctions, and crazy government spending it seems like we are in a whole new world everyday.
2022 will undoubtedly be an interesting year that analysts will look back on for years. In the first half, we saw soaring appreciation and deal velocity akin to 2021. The second half saw moments of panic with rate increases followed by numbers remaining relatively stable, with deal velocity taking the most significant hit vs. pricing as new listings plummeted. Overall, the main conclusion from 2022 that nearly everyone knows is that housing is not affordable.
As shown by the RedFin data, new listings in the second half of 2022 took a jump off the cliff, outpacing the last three years to the downside. Although deals are still happening, this drastic drop in listings and thereby, transactions have muted some downside pricing only continuing to foster unaffordability.
So, where do we go from here?
Indeed, rates have played into much of the buyer holiday we are seeing. Therefore, paying close attention to the 10-year treasury bonds will likely provide early indicators of when rates begin to ease. Additionally, paying close attention to affordability metrics including mortgage rates, wage growth, and home prices, will determine buyer demand. Simply put, there are an incredible amount of variables at play but until we see these three metrics begin converge to bring affordability back, the real estate market will likely remain in a correction.
Although we have no crystal ball here, affordability is not expected to ease in the first half of 2023. Many potential sellers will likely sit on properties they hold with low mortgages. Therefore many markets will fail to see a 10-15% decline in pricing that will assist in affordability and the FED remains committed to tamping out inflation.
However, suppose inflation indicators continue to ease as they are expected to do. In that case, a potential FED decrease is possible towards the second half of 2023, which may assist in 10-Year yields beginning to drop, bringing mortgage rates back into the more affordable 5% range, off their 7.3% high in October 2022.
If this occurs, we can likely see some home buyers who have been sitting on the sidelines come back to the marketplace, which in turn is likely to motivate sellers to list once again. If this doesn't occur and 2023 remains in the unaffordable range the market currently demonstrates, we are likely to see a horizontal pattern with a slight drift to the lower side. However, free fall doesn't seem to be highly likely as the nation continues to remain in a shortage of housing.
That said, variables in the macroeconomic picture, credit markets, and global commerce are likely to have their say. This could make 2023 another interesting ride where investors continue to play whack amole on where things are heading.
What are your thoughts? Please leave them in the comments below.
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