The housing market underwent several stages from 2021 through 2022, leaving potential buyers curious about their next steps throughout 2023. On November 10th, 2022, buyers witnessed mortgage interest rates peak at 7.08% in an attempt to curb the high sales prices of homes nationwide. With each 1.0% increase in mortgage interest rates, buyers lose 12% of their purchasing power. At its highest, interest rates decreased a buyer’s purchasing power by 42% compared to 2021, leaving buyers questioning whether or not homeownership is even attainable.
The Current State of the Housing Market
As of June 15, 2023, mortgage interest rates are 6.69%, less than half a point below their peak in November. Buyers have recouped some of their purchasing power but must still face high housing prices and high-interest rates. Earlier this year, RealtyHop found that housing experts did not expect housing prices and interest rates to fluctuate drastically in 2023 as they did in the past two years. In fact, some economists predicted that housing prices might decrease slightly as the market shifts in a buyer’s favor and limits the seller’s power.
According to the St. Louis Fed., home prices have increased by more than 33% since the start of the pandemic. Prices reached their highest in November 2022, when the median sales price for a home hit $479,500. During the first quart of 2023, home prices decreased slightly to $436,800.
Interest rates and housing prices made the housing market unaffordable for prospective buyers at the end of 2022. While both figures are slightly lower than that time last year, they have not dropped significantly enough to drastically improve conditions for buyers. Those who decide to face the current housing market should prepare for high sales prices and interest rates compared to several years ago. With summer on the horizon, economists’ predictions have proved correct, as housing prices and interest rates are still comparable to previous months.
Low Inventory and the Cost of Homeownership
A lack of available housing continues to plague potential buyers looking for space to purchase. With few choices available, sellers can continue to increase their asking prices as they will not have strong competition. Determined buyers must face the high housing costs if they wish to purchase property; otherwise, they will walk away empty-handed.
In April 2023, existing home sales decreased 3.4% from the previous month, and for-sale inventory reached its lowest level since April 2022. Year-over-year, housing sales decreased 23.2%, with only 4.28 million homes selling in April 2023.
In smaller markets with fewer residents less housing options available, potential buyers may not have a market to even participate in, leaving them unable to purchase a home. Markets with some available inventory have high enough prices that discourage potential buyers from conducting a real estate translation. The cycle continues to make homeownership unattainable for many Americans.
The National Association of Realtors (NAR) tracks the number of housing permits per new job across 174 metropolitan areas. While a 2:1 ratio of new jobs to housing permits establish a healthy baseline, there are many areas of the country where there are not enough new permits for residents, meaning those areas suffer from a housing shortage. For example, in the New York, New Jersey, and Pennsylvania area, the ratio of new jobs to housing permits sits at 4:1. The region, along with many others nationwide, currently faces a severe housing shortage.
Why is Inventory Low?
Low inventory is a significant factor currently affecting the American housing market. Low supply and high demand leave buyers with few options, and the options they do have are expensive.
Inflation continues to make the cost of building homes more expensive. While the supply chain issues that plagued the nation after COVID-19 are no longer as severe, high costs make it difficult to build properties.
During the Fall of 2019, the St. Louis Fed reported a decreasing number of active listings, which continued to fall in the following years. In February 2022, the country has the lowest number of available active listings since 2016, and that amount has only slowly crept back up in later months. Low housing starts, combined with fewer active listings for preexisting homes, only intensify the effects of a housing shortage.
Cost of Materials and Labor
The cost of lumber proves a valuable metric when evaluating the state of the housing market. In 2022, the cost of a 1,000-foot board of lumber was $780, which has decreased slightly to $525. Fewer housing starts continue to decrease the demand for lumber, which in turn brings down the price.
However, most of the country’s lumber imports come from Canada, which had to combat a severe wildfire season. Due to the wildfires, many mills cannot operate, and the cost of lumber is now the highest it has been since March. While demand for lumber has not drastically increased during the spring season, the lack of available products has slightly increased the cost. This could ripple into the housing market if materials continue to grow more expensive for developers.
For example, a 1,000-foot board of lumber was around $340 in May 2020. It skyrocketed over the coming months, peaking at nearly $1,700 in May 2021. Even though it came down substantially, the price is now at $780, significantly higher than pre-pandemic levels. The high cost of goods, along with a labor shortage and supply chain disruptions, make building new housing a more expensive, challenging, and lengthy process.
2008 vs. 2023
Prospective homebuyers and current homeowners may worry about how the current housing shortage compares to the housing crisis of 2008.
The previous housing crisis resulted from unsustainable lending practices by financial institutions. Those lending practices and inconsistent reporting contributed to the housing price bubble, as the constant swapping of mortgage bundles inflated each bank’s expected financial return. Banks then made investments as if they already had that larger sum of money, further contributing to the bubble.
Today’s housing crisis is primarily a supply issue and a consequence of high inflation and rising costs across the board. Prospective buyers should not wait for a bubble to “pop” and for housing prices to decrease drastically, as inventory must increase to satisfy demand.
Learn more: What Happened in 2008?
How is Inflation Impacting the Housing Market?
In July 2022, inflation reached 9.1%, increasing the cost of goods and services. Housing costs remained high throughout the summer, and many potential homebuyers could not afford an unaffordable home and high-interest rates.
By April 2023, inflation cooled down to 4.0%, and the Federal Reserve even skipped a rate hike after ten consecutive increases in previous months. While economists predict that the Fed will raise interest rates several more times this year, the temporary pause reflects lower inflation levels. While the Fed continues to monitor the ongoing level of inflation, it may need to increase rates again to stabilize the economy.
However, lower inflation levels do not necessarily correspond to lower asking prices. Instead, this information suggests that housing prices should not drastically change. Prospective homeowners who sat on the sides and saved for a down payment over the last year can expect to find similar asking prices as in 2022.
Learn more about asking prices in your market: RealtyHop Housing Affordability Index: May 2023
Is Now a Good Time to Buy a House?
Potential buyers may wonder if now is the time for them to explore the market and purchase a new home. While the decision to purchase property comes down to a buyer’s financial and personal goals, current budget, and desires in a new home, current market conditions also play a significant role in determining whether or not to complete a real estate transaction. Buyers should consider purchasing property for the following reasons:
You Wanted to Buy in Previous Years
Prospective buyers in 2021 and 2022 faced a plethora of challenges, from bidding wars to high-interest rates. While some of those conditions still exist in today’s market, they are no longer as surprising. Interest rates reached high levels and likely will not fall back to historic lows in the near future. Those who wished to buy property but ultimately sat on the side likely have more savings for a down payment and potentially higher-paying jobs to afford higher monthly mortgage payments.
The Cost of Renting is Too High
The housing crisis affects property owners and renters. With low inventory in metropolitan areas like New York City, those who wish to rent must face high rental prices. The median rental price for a New York City apartment just reached $4,350 in June. In a city where renters must generate an income 40x the amount of their rent, this means renters must make $174,000 to qualify for an apartment.
However, those looking to buy a property at the median sales price of $950,000 could acquire a 30-year mortgage term with a 20% down payment and a 5.5% interest rate. Under those conditions, they would submit a monthly mortgage payment of $4,315.20. With specific mortgage terms and a sizeable down payment, it may be more affordable to buy than rent. However, homeowners should know that they pay other housing costs, such as HOA fees and property taxes.
You’re a First-Time Homebuyer
First-time homebuyers face the challenge of a down payment when figuring out how to afford a home. This financial burden affects different areas of the country more significantly than others, as it could take buyers in Glendale over 15 years to save for a down payment, compared to just over two and a half years in Detroit.
However, prospective homebuyers can use first-time homebuyer programs to help them afford the cost of a home. Programs assist with down payments, closing costs, and tax credits to alleviate part of the financial burden. Sometimes, those who make qualifying incomes can avoid the down payment completely.
With slightly lower asking prices in certain areas of the country, savvy first-time homebuyers can use programs to leverage their current situation and acquire a home without breaking the bank. Buyers should consult with their mortgage lenders to find access to additional programs in their local area.
Housing Prices Slightly Decreased in Some Markets
Last year, experts advised that housing prices would not dip drastically in the coming year. While housing prices did not decrease at a level to significantly change the type of home a buyer can acquire, housing costs did slightly drop in some areas.
For example, Newark buyers expected to pay a median of $390,000 for a home in June 2022, but that number decreased to $385,000 in May 2023. Homebuyers in regions with lower asking prices may be able to afford more house for their dollar, or simply acquire a lower monthly mortgage payment amount.
Prospective buyers with savings and a desire to purchase property may find slightly more appealing asking prices this year than last year.
Learn more:
Should I Wait to Buy a House?
Prospective homebuyers may not decide to purchase a property for plenty of reasons. Considering current market conditions, they may wait because:
Interest Rates are Still High
Interest rates likely will not drastically change in the future, but prospective buyers who planned to purchase property in the past few years likely did not budget for rates to double. Homebuyers have less spending power than they did in previous years, meaning they must save more or settle for a smaller home with fewer must-have features.
Low Inventory in Your Area
The housing shortage affects different regions based on their current volume level. In high-density areas and cities, there are still plenty of units on the market. Buyers may therefore engage in bidding wars or increase their initial offers to ensure they get the desired property.
However, those in low-density regions may be unable to find a home in their price range, desired room size, and preferred location simply due to low inventory. Homebuyers in this position may need to wait for a property to come on the market that meets their search criteria, directly affecting their ability to purchase in the coming months. Those in this position can use the opportunity to save additional funds for a down payment.
You’re Interested but Unsure
Purchasing a home is a difficult decision for potential buyers. Freddie Mac suggests that the housing market should remain steady over the coming years, meaning asking prices and interest rates will not change at the rates they did throughout 2021 and 2022. However, they do not have strong evidence to suggest a strong housing market in the coming years.
Compared to past buying seasons, current homebuyers face a more stable market that should continue for a few cycles. Therefore, someone interested but not wholly committed to moving this year can take comfort in knowing that they can participate in similar market conditions down the line.
Consider Economic Indicators
When determining whether it’s a good time to buy a home, homebuyers should review key economic indicators, including the following:
Housing Starts
Housing starts are a leading indicator that showcases developer confidence in the housing market. A high level of housing starts means that developers have the resources to build new homes and are actively deciding to take that action. Therefore, they feel secure in knowing there will be buyers to purchase the property upon completion.
On the other hand, low housing starts can signify that developers do not have enough materials and labor to build homes. It can also display that developers with resources are not making the decision to invest in the market, as they do not feel confident in their ability to recoup their investment.
Interest Rates
Interest rates significantly impact the housing market. Higher interest rates mean higher monthly payments and, therefore, may decrease housing demand. However, when the Fed slashes interest rates to boost the economy, housing demand increases as homebuyers try to secure a favorable interest rate.
Interest rates impact how much a homeowner spends monthly on their mortgage payment. Borrowers should consider different mortgage types, like an adjustable-rate mortgage (ARM) vs. a fixed-rate mortgage. An ARM will help homebuyers with an initial lower interest rate, but that rate could increase to meet market conditions in the future. Fixed-rate mortgages lock a borrower into the market rate. Homeowners can also refinance their mortgages to acquire a lower interest rate and other more favorable mortgage conditions.
Conclusion
Prospective homebuyers always face the question, “Is now a good time to buy?” and should analyze current market conditions and their personal financial situation and desires to find an answer. Compared to last year, buyers will find more favorable interest rates and potentially asking prices. Those who wanted to but ultimately avoided buying last year or in 2021 will find the current market more stable if they can find a home that meets their search criteria.
Those who are on the fence about buying do not need to make a decision just yet, as conditions will likely remain stable in the coming years. Prospective buyers can use this time to analyze asking prices in their area, determine the type of mortgage they would use to finance their purchase, and save for a down payment.
Buyers can utilize the RealtyHop search pages to find properties in their area and reference additional articles that describe specific properties, homebuying terms, and market updates.
