With the housing market oscillating from a buyer’s market to a buyer’s nightmare throughout the pandemic, many are optimistic that 2023 will give buyers some more leverage as mortgage rates start to cool off from what they were in 2021 and 2022.

A Recap of the Housing Market During the Pandemic

Buyers were in a frenzy in 2020 and 2021 due to historically low interest rates, low inventory, and a desire to move as office workers were liberated from their daily commutes. This demand was the leading cause of the skyrocketing home prices during the pandemic, as the lack of supply made it normal to see double-digit price increases, making it a hallmark of the pandemic housing market.

However, this frenzy came to a halt in the spring of 2022. Due to their inability to afford the absurd price of purchasing a property in this new world, buyers vanished from the market. And as stock prices fell, individuals who had intended to use their stock holdings as a down payment source saw their fortunes decline.

While a nightmare for buyers, the Federal Reserve signaled that the spiking mortgage rates would help the market to “reset” in a sense, throwing cold water on the housing demand boom during the pandemic. By allowing inventory to catch up, housing prices could lower, which is already happening.

Mortgage Rates and Inflation

Mortgage rates are primarily affected by the U.S. federal inflation numbers and the U.S. 10 Year Treasury. However, inflation numbers usually come out two months after they are recorded. What this means is that inflation from two to three months ago is actually impacting mortgage rates today.

By taking a look at the data, we can see that in:

• 1/21/22
  • The U.S. 10 Year Treasury was 1.747%
  • Inflation was at 6.2% (Oct 2021 which affected rates in January 2022)
  • Freddie Mac average 30-year fixed mortgage rate was 3.56%
• 10/24/22
  • The U.S. 10 Year Treasury was 4.234%
  • Inflation was at 9.1% in June 2022 (the peak)
  • Freddie Mac average 30-year fixed mortgage rate was 7.08%
• 1/20/23
  • The U.S. 10 Year Treasury is 3.431%
  • Inflation was 6.5% when released in December 2022
  • Freddie Mac average 30-year fixed mortgage rate is 6.15%

With the numbers above, you can see that the forecast is for lower mortgage rates as we go into the spring market.

Predictions for the 2023 Housing Market

If mortgage rates continue to fall, we could see many buyers returning to the market in 2023. Buyers that currently own a house with an interest rate in the 3%s and 4%s held on to those houses in 2022. The dramatic increase in rates of 3.5% kept homeowners in their current houses. Now that the market is shifting and rates are coming down, these repeat buyers will be listing their current houses in the normally busy spring market. This has more homes opening up for first-time buyers and has the newly built, more expensive homes coming back to the market in 2023.

In addition, seasonality has some role to play in the forecast for the 2023 housing market, at least in Q1. It is customary for the housing market to be at its slowest around the end of a year, perk up again in January, and then surge during the spring selling season.

Resale inventory will be a crucial factor to watch in the upcoming months. In November and December, researchers observed a large number of current homeowners take their properties off the market because they didn’t sell as quickly or for as much money as they had intended. If this seasonal interest does make the housing market heat up again, it will be important to keep an eye on whether these sellers decide to re-list during this typically busier time of year for real estate.

On the contrary, however, one of the chief economists on mortgage rates in the country, Lawrence Yun, has predicted home sales will decline by 7% in 2023. While this was mostly with concern for the lack of inventory, this should be seen as a positive sign for buyers, as while it is still more expensive to buy a house than it was years ago, they should have more time to think and negotiate on repairs or price. The lack of absurd competition and unseen offers will certainly make the buying process much less miserable, especially for those entering the market for the first time.

As a partner at Tully Rinckey PLLC, Darren helps New Yorkers with real estate transactions and the preparation of estate planning documents. He has extensive experience in real estate transactions and works with buyers, lenders, and sellers to get the best possible outcome for all. He can be reached at info@tullylegal.com or at (888)-529-4543.