A rosy 2023? Yes, despite everything.

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. We can then venture some predictions for 2023.

How 2022 changed the market

In general, 2022 was marked by a rapid and intense increase in interest rates and a growing inflation rate. The real estate sector cooled compared to the boiling climate of 2021. In addition, the geopolitical tensions of ongoing conflicts have created a climate of uncertainty and caution.

Freddie Mac (The Federal Home Loan Mortgage Corporation) drew up the graph below. It shows how significant the rise in interest rates has been over the past twelve months for thirty-year mortgages. Rates went from 3.1% to a peak of 7.1%, and then settled at around 6.5%.

The increase in interest rates went hand in hand with the increase in inflation. Inflation started from below the 2% threshold at the beginning of 2021 and reached a peak of 8.2% in October 2022 (graph below). It then stabilized in November at about 7.7%.

Why many investors are worried about 2023

Many investors and owners are therefore looking at 2023 with concern. This is 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. On the contrary, 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, to make any predictions on the trend of the real estate market, it seems essential to analyze what could happen to interest rates. Which scenario seems most probable? Will rates rise, as some predict, beyond the 8% threshold? Or will the downward trend of the last month continue?

Three scenarios for mortgage rates

The National Association of Realtors has outlined three possible scenarios for mortgage interest rates for next year:

Scenario 1

“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%.

Scenario 2

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.

Scenario 3

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, rates are more likely to fall. In their view, inflation would stay under control and the real estate market would recover rapidly. For example, ATTOM Data Solutions, a leading company in the collection and analysis of real estate data, shares this opinion. According to the company, 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%”.

What this means for 2023

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. It was driven by heated post-covid inflation and the need to stop rising prices. However, this did not cause a proportional drop in the real estate market. On the contrary, the industry has proved solid despite an aggressive rate policy. This happened in a difficult phase for buyers. Moreover, interest rate increases seem to have stopped, or at least eased. For these reasons, the market can plausibly restart quickly and score a new record. The only extreme scenario in which the sector could suffer is a very aggressive Fed intervention. Such an intervention would purposefully cause a general collapse in prices. In the writer’s opinion, such a scenario 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.