Have Interest Rates Peaked
As we start 2023, I’m giving my 7 bold predictions for the real estate market. Make sure you stay until the end when we’ll go over what prices are likely to do this year, talk about a potential real estate crash, and I’ll even give a bonus prediction. If you’re looking to buy or sell a home in 2023, this information can help you make the best decision based on your situation and allow you to time the market to your advantageHave Interest Rates Peaked
Let's start with interest rates because that's what's really driving this real estate market right now. A lot of people, including myself, think here locally and nationally that once we hit the 5% interest rate mark, this market's really going to open back up in terms of volume and price appreciation. So the question is, when do we get to 5% and have real estate interest rates peaked?
We saw interest rates in 2022 get above 7%, they've now come down into the 6’s. What’s going to happen is the Fed continues to raise interest rates at a slower pace. I've really struggled with this one because the Fed is saying they're going to probably increase their overnight rate at least another three-quarters to one percentage point, if you believe what they say.
I’ve struggled with whether we are going to hit 7% or 8% or if we have peaked. Here's my bold prediction. Since the interest rates have continued to increase with the Fed, I think a lot of this has already been priced in. Plus with consumer inflation starting to come down, I believe that interest rates have peaked and I do not believe we'll see interest rates in the 7’s. I think we'll see interest rates in the 6’s this year continuing to come down and in 2024 we're going to hit that magic number of 5%.
Fewer Home Sales
Because of these higher interest rates, I think we're going to see fewer home sales. In fact, we're already starting to see it. We're about 30% off of the peak, both here locally and nationally. Real estate sales peaked at over 6 million homes sold nationally in 2021. I believe we'll see somewhere between 4 to 4.5 million homes sold in 2023, probably closer to 4.25 million sold. Here locally I believe we’ll continue to stay 30% below what we saw in the last couple of years.
Once we hit that magic 5% interest rate mark, I think this market is going to start to explode in terms of volume and we're going to hit that peak level again. There's actually 29.1% of the active renters today that can afford the average median home so there are a lot of people sitting on the sidelines waiting for lower interest rates.
Flight To Quality
With fewer home sales being prediction #2, that leads me to prediction #3 which is a flight to quality from the consumer. For the last couple of years, you could hire any real estate agent to sell your home. This next market is just not going to be that.
Since half of our local real estate agents sell between 0 to 2 homes per year, the consumer is really going to wise up to that and choose the best. The last time that we had this number of homes sold, the 4 million homes sold range, we had about 500,000 to 600,000 fewer real estate agents than we have today. My bold prediction is one out of every three real estate agents leave the market in 2023.
Since we have higher interest rates and fewer home sales, builders are starting to slow down their production. The challenge is they are not likely to keep up with demographic changes, since we're continuing to have new family formations, we're simply not going to build enough homes during this period.
We already have a 5.5 million home deficit nationwide, and that deficit is likely to increase over the next year due to these higher interest rates, fewer sales, and builders getting conservative. On top of that, we also have a transformer challenge where a lot of builders are struggling to even put home sites on the ground because they can't get these necessary transformers to build on those lots.
Rents Begin To Fall
In 2023, I believe rent will begin to fall. We've had a very strong rental market with prices increasing and we've also had low vacancy rates, but I believe rents are going to start to fall. Especially as we see lowering interest rates attracting a lot of that 29.1% of buyers that are renting that can afford the median price home. That's going to lower the demand for the rental market and decrease prices.
I think we're going to see probably somewhere around a 5% to 10% decrease.
Real Estate Values
What are real estate values going to do in 2023? In general, it's going to depend on the sub-market that year. You're going to hear a lot of national news about home prices falling but it's going to depend on the market that you're in.
Now, watch for interest rates to come down to 5%. Some economists are predicting that we may see that around Q3 but I think it might actually happen more likely in 2024. Either way, whenever that does happen, expect to see that we're going to have price increases at that point as that 29.1% of renters that can afford that average median price home get off the sidelines and start to purchase again.
Real Estate Crash
I promised to talk about the real estate crash and here it is, it's already happened. It's not happening like a lot of people were expecting. It's not a price crash, it’s a supply crash.
This all goes back to 2008 when we had prices crash and fall but what also happened was builders slowed down the production of homes. We had increased demographics and new family formations, but we simply did not build enough homes during that period. I think it was somewhere on the order of 12 million new families formed, but only about 7 million new homes were built. That left us a 5 to 5.5 million home deficit where we currently stand today. The challenge with 2023 is builders are beginning to slow down once again so the supply imbalance is likely to continue to increase.
What happened is we had too few homes going into the pandemic, interest rates dropped to extremely low levels and we incurred increased demand. That's how we ended up with record-high price appreciation. The challenge is once we see interest rates at that 5% mark again, we're likely to increase the demand but supply has not kept up. We're going to likely see a very strong appreciation going once we see 5% interest rates.
Here's my bonus prediction for 2023. I predict that Coastal Life Realty Team will be the #1 team in the Greater Newburyport and Seacoast NH market, and If you're thinking about buying or selling in 2023, you deserve to work with the best so contact us today!