What is the current trend of the real estate market? Let’s venture some predictions for 2023.
We are approaching the end of a busy 2022, and the new year has left us wondering about the immediate future. It is therefore the ideal time to evaluate what is happening in the US real estate market and venture some predictions for 2023.
In general, 2022 was marked by a rapid and intense increase in interest rates, a growing inflation rate, and a cooling of the real estate sector compared to the boiling climate of 2021. Added to this are the geopolitical tensions of the ongoing conflicts, which have contributed to creating a climate of uncertainty and caution.
In the graph below, drawn up by Freddie Mac (The Federal Home Loan Mortgage Corporation), we can immediately understand how significant the rise in interest rates has been over the past twelve months for thirty-year mortgages, going from a value of 3.1% to a peak by 7.1%, to then settle at around 6.5%.
The increase in interest rates went hand in hand with the increase in inflation, which started from below the 2% threshold at the beginning of 2021 and reached a peak of 8.2% in October 2022 (graph below), to then stabilize in the month of November to about 7.7%.
Many investors and owners are therefore looking at 2023 with concern, above all because of the pessimistic, and sometimes even catastrophic, forecasts of some market operators.
In reality, the real estate market has proved to be extremely solid and stable with respect to the factors that could have caused its decline (including interest rates and inflation). There are no alarming signals or data that suggest a downward trend in the market. On the contrary, the month of November 2022 is also preparing to mark a general increase, albeit slight, in median prices and sales values (for official and always updated data relating to the Miami area click here).
Therefore, in order to make any predictions on the trend of the real estate market, it seems essential to analyze what could happen to interest rates and what seems to be the most probable scenario. Will they rise (as some predict) beyond the 8% threshold? Or will the downward trend of the last month continue?
The National Association of Realtors has outlined three possible scenarios for mortgage interest rates for next year:
“In scenario no. 1, inflation continues to remain high, forcing the Fed to repeatedly raise interest rates. This means that mortgage rates will continue to rise, possibly close to 8.5%.
In scenario no. 2, the consumer price index would respond more to Fed rate hikes and thus we would see a gradual deceleration in inflation, causing interest rates to stabilize near 7%-7.5% for 2023.
In scenario n3, the Fed would repeatedly hike rates to curb inflation and the economy would fall into a recession. This could rapidly bring rates down to 5%”. According to other analysts, however, the road would seem to be that of reducing interest rates, with inflation under control and a rapid recovery of the real estate market. For example, ATTOM Data Solutions, a leading company in the collection and analysis of real estate data, shares this opinion, according to which rates could reach a peak of around 8% and 7.25% (respectively for thirty-year and fifteen-year mortgages) throughout the beginning of 2023, “to then gradually decrease over the course of the year and settle respectively at around 6.0% and 5.25%”.
With respect to these data and forecasts, we can draw some considerations.
As seen, 2022 recorded one of the fastest and most impressive increases in interest rates in history, due to heated post-covid inflation and the need to stop the rise in prices. However, this did not cause a proportional drop in the real estate market, on the contrary, compared to an aggressive and upward interest rate policy, the Real Estate industry has shown itself to be solid. If this happened in such a critical and difficult phase for buyers, and if – as it seems – the upward trends in interest rates have stopped (or are at least attenuated) it seems more than plausible that the market can restart quickly and score a new record. The only (and extreme) scenario in which the real estate sector could suffer would be a very aggressive intervention by the Fed to curb the economy and purposefully cause a general collapse in prices. Such a scenario, in the opinion of the writer, does not seem foreseeable or justified.
The forecast for 2023, therefore, looks rather rosy, at least in major urban areas of the United States. The real estate market seems ready to restart and create new wealth.