Welcome to January 2023. It is time for everyone to do their forecasts for the coming year when “experts” try to predict the future. Do they really know what to expect? Absolutely not. The smartest people are those that admit they don’t know what will happen. Some of the most egotistical act like they know. To be blunt, most people, no matter their profession, are looking for a forecast that matches what they are already doing so they can justify not making any adjustments. Change is scary.
The same thing happens in sports. Nobody knows who is going to win the World Series because there are so many random factors that can intervene throughout a 162-game season and four rounds of playoffs. Experts may have an informed opinion but most are still wrong 40% of the time.
In 2022, most of my predictions were broad. I thought we would see inventory increase as inflation went up. I thought we would see a gradual rise in interest rates. The Fed Rate actually doubled from March 15-June 15th. As a result, many buyers that were on the fence were pushed off because they could not afford the loan with the new interest rate. I had also predicted that Buyer Agents would have to start getting paid by the buyer rather than by the listing agent. How did I do?
Inventory increased from a low of 1,280 listings on March 15, 2022 to over 5,700 by the end of the year, a 445% increase.
Interest rates that were 3%-3.25% ended the year near 6% after topping out at 7.08% in October according to Freddie Mac.
Not only did Buyer Agents not have to get the buyer to pay their fees, even builders began offering incentives over and above normal rates to Buyer Agents.
As you can see, nobody has a crystal ball.
As a result, this year, rather than trying to make predictions for 2023, I’m going to point out some things to watch for:
Keep an eye on Ukraine.
If the United States gets pulled into the war in Ukraine, all bets are off. History shows us that there are positive economic short term benefits during wartime, mostly through increase in economic growth provided by the spending boom.
Will it scare the general public into pulling back their spending if we go to war? That is the question. If the war grows and becomes more globally backed and countries are forced to choose sides, it could create a massive change in the global economy. This one is completely unpredictable.
Inflation in the US is starting to go down and should continue on that trend.
Rates follow inflation. As we eliminate the highest monthly inflation rates of the last 12 months and replace it with smaller numbers, the annual rate will go down.
Even if inflation rate is zero, the 8% from last year is still in place and until household income/wages catch up to that, it will be harder on families to survive.
The FED will be the driver of the economy in 2023.
The indications from Jerome Powell, the chairman of the Fed, were that the hiking of rates would continue and top out above 5%. Although we saw a slowdown from 75 basis points hikes earlier in the year to only 50 basis points in December, that doesn’t mean those hikes will stop.
The Fed is basically causing people to stop buying houses and cars at the rate they have been. You have probably noticed that there are more cars on dealership lots and we talked about the increase in housing inventory already.
Expect both of those to continue. On the upside, the end of the 2023 model year, might be a great time to buy a new car if you will be in the market in July or August.
New construction will continue to build and the pace should remain consistent with last year.
National builders that have a stash of cash and have cleaned up their supply chain issues will continue to build but expect prices to stabilize. The days of $25,000 price increases in a single month are over.
Hotter markets around the country like Raleigh and Durham, NC, where I am located, will stay strong due to the expansion of job opportunities in the area. The obstacle for this is that wages must catch up to allow buyers to get into the market.
With the median sale price in the Triangle MLS above $400,000 for the first time in history, a $100,000 annual salary is almost a must in order to get into a baseline new construction home unless you drive 30 minutes from the downtown areas. New construction nationally was around 4.5 million units in 2022 and I expect that to remain about the same.
Understand the inventory of the market.
Realtors often think of inventory in terms of what is available for sale. I would ask you to change your thinking on that. Every year, approximately 100,000 homes become no longer usable for a variety of reasons; fire, old age, tear down to build new, etc. New construction is the only way to truly add to home inventory.
Estimates have 4.6 million new homes built in 2022. As migration from one area of the country to other parts of the country continues, different areas are in different growth modes.
A massive influx of people like Austin, Atlanta, Charlotte and Raleigh have experienced in the last 10 years (all with population increases of 25% or more) causes not only a need for single family homes but also for apartments. In addition, the only way to create affordable housing options is to build high density townhomes and condos with local amenities and “walkability.” Expect that trend to continue as lots get smaller and density gets higher.
Home prices are going to depend more on hyperlocal markets.
Two neighborhoods that are side by side can have a significant difference in home values. As a result, it is becoming more difficult to pinpoint a price for a property. It certainly can’t be done by a computer.
Over the last 30 years, the United States has had a median home price increase of 4%. That is expected to continue for the next few years. There may be areas of booming prices, but they will be few and far between in 2023.
Many homeowners that purchased in 2020 and 2021 during the Covid-19 Pandemic, are having buyers’ remorse. Will those homeowners sell what they currently have and buy up or will they remodel? I think we will see a combination of both. It will depend on the income bracket and whether they are willing to sell a home with a 3.25% rate to buy one with a 5.5% interest rate.
Bottom Line
The bottom line is that there are still going to be opportunities in 2023. Some will be for buyers; some will be for sellers. Some will be for investors.
Positioning yourself for those opportunities is key. My grandfather used to say, “It is not the opportunity of a lifetime if you can’t afford to take advantage of it.” Living within your means and saving when you can will enable you to take advantage of the opportunities as we go forward.
I hope you have a fantastic 2023!
BP8