What will the housing market look like in 2023? Should you Buy Now or Wait? What will housing affordability look like in the new year? Will Housing Prices Crash? In this episode, we discuss our housing market forecast on inflation, interest rates, supply, demand as well as the direction of house prices in 2023.
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: Welcome to season two, episode one of the Educated Home Buyer and happy new year. Today’s episode, we’re actually going to give you our housing market forecast. We’re gonna tell you what is likely to happen with regards to housing in 2023. We’re gonna touch on everything from inflation to interest rates to inventory, supply, demand and give you three different cases of what’s likely to happen. Best case scenario, worst case scenario and somewhere in the middle of the road. So Josh, where do we start?
[00:00:32] Josh Lewis, California Mortgage Broker: I think it’s important to talk about what we’re doing here and why we do this. It’s not a crystal ball. We talk about it on the live show. We talk about it here in the podcast that no one, the smartest people in the world, which we have access to, a lot of them, know exactly what’s going to happen. The best case in point, Jeb, if we go back to this time last year, you and I both expected interest rates to increase. Possibly going as high as 4%. We’re gonna see here in a minute they went up over 7% for a brief period.
We thought that would lead to home price moderation and potentially a lower volume of sales. Well, interest rates were the key driver of everything. That spike in interest rates brought sales price appreciation way down, and more importantly, sales volume way down.
So we do not have a crystal ball. We are industry veterans. We’ve done this for a long time, and our business and our livelihood depends on it. So even if we weren’t here, if there was no YouTube, if there were no podcasts, no one to talk to. Jeb and I would still have to go through this exercise. Because how the market plays out depends not just on business volume, but what are people looking for? What do people need? What guidance do they have to have?
We have clients, whether we’re only dealing directly with the clients that we transact with, or whether we educate and advise people here through different electronic mediums. We still have to go through this. So this is basically look over our shoulder on the research that we are doing. The really sharp, really smart people that we follow who thought this through, these are not just random guesses. These are educated opinions on how 2023 is likely to play out, and we want you to have access to all that information.
[00:02:15] Jeb Smith, Huntington Beach Realtor: Yeah, and I think it’s important to note too, like not only were we wrong about interest rates and them going above where we thought we were also wrong about house prices in the sense that Josh and I both forecasted in the last quarter of 2021, that we thought that the housing market would slow as we headed into 2022, and that home prices would more or less moderate to some extent.
And what we saw was exactly the opposite. The first quarter of 2022 was gangbuster and housing appreciated a lot more than actually what we thought it would appreciate. Now, towards the end of the year, things slowed down because interest rates continued to increase. But we were somewhat conservative in home prices, conservative in where rates were gonna go.
Ultimately, it led to where we thought the market was going to be, which was a slower market. So, Josh, where do we start today? I think the two key components of what we’ve seen over the last couple of years outside of the stimulus that the Fed and the government has pumped into the market and kind of created this artificial craziness in values is inflation, right?
Inflation and interest rates, inflation is something that came because of all of this stimulus. And interest rates are something that they, I won’t say artificially created interest rates, but they artificially brought them lower than they had been in a very long time and kept them a lot lower than they probably should have for a longer period of time which, led us to where we are now.
We know that as inflation goes down, as inflation moderates, interest rates are likely to follow. Historically speaking, that’s what the data shows and we’ve actually seen it, right? So we’ve seen it in the numbers as inflation has slowed. We’ve seen interest rates pull back a little bit, but I think it’s important to maybe start and talk about inflation, where inflation was, where interest rates were, where we are today, and that gives us a jumping off point to give a projection to where we think things are headed.
[00:04:07] Josh Lewis, California Mortgage Broker: Let’s outline the three things we’re gonna talk about in terms of projecting what we think is gonna happen the next year. Number one, interest rates. Number two, home sales volume. So the number of homes that will sell. And then home price trajectory, which is kind of the hardest of those three.
The others are kind of… the numerical equation where we can back our way into it within reason. So interest rates are the best and most important part to start with because they have dictated what’s happened in the second half of this year, and they will dictate what happens into 2023.
[00:04:38] Jeb Smith, Huntington Beach Realtor: January of last year, interest rates started the year at 3.29%. Right.
[00:04:43] Josh Lewis, California Mortgage Broker: So the first day you could lock in a mortgage rate, the average rate was 3.29%. And again, most everyone was expecting they would trend up. Was that number three and a half? Three and three quarters. Four. Four and a quarter. Who knows? Well, by April 1, the first mortgage trading day of Q2 for last year, we were [00:05:00] at 4.88%. That’s like a 50% increase in a matter of 12 weeks.
[00:05:05] Jeb Smith, Huntington Beach Realtor: But I think it’s important also. Let’s talk about context. Why? Why do we see it go from 3.29 to 4.88 in just a three month period of time?
[00:05:14] Josh Lewis, California Mortgage Broker: Two things. It became very apparent that inflation was not moderating and was in fact accelerating. And at the same time, our friends over at the Fed made it very clear that they were completely tone deaf, and were going to ignore that fact until the very last possible moment. As crazy as it sounds, at this time last year the Fed was still doing quantitative easing. They were buying treasuries, they were buying mortgage backed securities.
And despite the fact that it appeared as though we had recovered from Covid. People were not at risk of losing their homes. We didn’t need any stimulus for buying homes. They were stimulating the economy and ignoring the fact that inflation was a big and growing problem. So that’s what happened. Now, our beginning of the year projection was that we thought kind of a worst case would be about 5%.
That’s like the world goes to hell. We hit around 5% and we were there in the first 90 days of the year, and my thesis was if we get to 5%, that will have a massive negative impact on home prices. And what we saw is we didn’t really see any impact until we got over 5%. That first quarter of the year rates going up, actually got people off the fence, buying homes and home prices accelerating even faster than they had I in 2021.
By July 1, it crept up a little bit again. At five and a half and we’re like, Okay, maybe this is the peak. Instead the 5% we’re at about five and a half. October 3rd, 6.69%. you’re like, holy geez, how high can these things go?
We had seen mortgage applications, purchase mortgage applications. You know that when rates are increasing like that, refinances are going to disappear. Most people refinance to get a lower interest rate. So by that time, by the start of the fourth quarter, there were virtually no refinances because everyone had already refinanced the last few years and the purchase index, the purchase application index was at its lowest level since like 2014. And rightfully so, people have seen home prices go up and interest rates more than double in nine months.
And from an affordability perspective, the home price for the equivalent home in the last nine months was 50% higher. Roughly plus or minus 50% higher. And it just removes the volume of people who can afford. So by October 20th, we hit the absolute peak. According to National Mortgage News, they had 7.37. I think if you look at Freddie Mac’s number it peaked at 7.2%, and that does at this point appear to be the peak in interest rates.
We’ve corrected a lot. We’re down in the low sixes now for well-qualified buyers. And an important thing, Jeb, that I want to point out and there is going from 7.25% to 6.25%. We’ve seen mortgage purchase applications increase 10%. They’re still at historically low levels. But it tells you that buyers of homes are very rate sensitive, rate and payment sensitive.
And if and when rates moderate we will see buyers come back into the market. We’re not gonna see the volume that we saw in 2020 or 2021. Another concept that we wanna talk about is those subsidized low interest rates for the last couple years, pulled a lot of demand forward.
People who would’ve bought in late 2022, in 2023, in 2024 said, “This is a once in a lifetime opportunity. We need to buy now. Prices are going up. Rates are really low.” So we’re seeing the natural end result of the Fed stepping in and not allowing free and open markets, they manipulated the market, and now we’re seeing the repercussions of that both through interest rates and sales volume, which we’ll hit in a minute.
[00:08:50] Jeb Smith, Huntington Beach Realtor: Yeah. And the reason that we saw these interest rates go up, right? And inflation was out of control, but a lot of it had to do with volatility in the market in general. You know, what the Fed was saying versus what they were doing, how the numbers were reporting. We’ve talked all the time about when the market delivers on what the traders are expecting, then everything seems to be pretty smooth with regards to how interest rates adjust, how the stock market adjust, but. What happens when they deliver on data that’s different than the expectations, that creates volatility in the market.
And that volatility is what creates these massive moves in bond prices and in interest rates. And essentially that’s what we’ve seen. But where we saw the peak, in what was it October?, you mentioned Josh was at a time when the Fed had pretty much come out with their game plan.
This is what we’re going to do over the next couple of meetings. And as we saw, they’ve delivered on those expectations. At the same time, we’ve seen that what they’re doing with regards to raising the Fed funds rate is bringing down inflation now? Is it already bringing down inflation? Is what they’re doing already having an impact on the market? [00:10:00] That’s tough to say. Or is inflation coming down naturally?
I think it’s probably a combination of both, but what I will say is I think a large majority of what they have done with raising the Fed funds rate hasn’t even impacted inflation quite yet. We’re probably a couple of months out from actually seeing the impact of some of these last increases with regards to raising the Fed funds rate. But we’re close to where they’ve more or less said that they’re going to quote unquote pause and take a look at the market.
And because of that, rates have stabilized and that’s where we’re starting the year, right. Stability is one of those words, it’s tough to say with regards to interest rates, but probably the most stable we’ve been, is that fair to say, in the last six months?
[00:10:43] Josh Lewis, California Mortgage Broker: Yeah and piggybacking Jeb on what you said there in terms of inflation, inflation is the story. So the Fed can either Accelerate or put the brakes on what the market is doing, but the Fed is not the driver of what’s happening.
One of their mandates is to keep inflation at 2%, which their preferred measure is the PCE. For this year the market has looked closely at Core CPI now, in terms of Core CPI, it peaked at 6.6% in September. And you guys are probably saying “no, no, it was like seven or 8%.”
We’re talking about core. Core excludes food, which has gone up a ton and energy, which energy is actually moderated. The expectation was with our economy still pretty strong and wide open. China reopening, OPEC shutting off supply, and then the war in Ukraine, that energy prices were gonna be nuts here through, through the fall and winter.
And that’s moderated, but those numbers are not included in C P I because fed policy doesn’t really have much impact on either of those two. So Core C P I peaked at 6.6% in September. It dropped to 6.3 in October, dropped to 6% in November. You can go back and look at some of the other content that Jeb and I have done.
The open for the live show two weeks ago, went through and showed that chart of what it looks like over the next six months, the way CPI on the year over year measure is, it’s just a sum of the month over month numbers for the previous 12 months. Well, for the next 6, 7, 8 months, we have really hot numbers falling off and we’re likely to continue to see much lower numbers.
So if we flash forward to middle of the summer next year, we’re in the threes on core C P I, if not even slightly below. Now, if we’re at 3%, that is fantastic relative to 6.6%. It is still 50% higher than the Fed would like to see it. But remember, we do not care about the absolute level of this when we’re forecasting the future direction of interest rates, we care about the trend.
So if we go from 6.6 to three and it looks like it’s continuing to moderate and all of the Fed actions are having the intended impact, then we’re likely to see mortgage rates continue to improve. Very unlikely that in the near term future, we go back anywhere near the 2.75, 2.9, 3.25 that we saw through 2021, but they should moderate a a bunch from here.
And, and Jeb’s sort of transitioning from there, one thing I wanna talk about is people think, “well, the Fed’s doing this, so interest rates are gonna go up.” Every time the Fed meets over the last six months, we have known that they were gonna increase 0.75% or 0.5%. So my phone would ring with people we’re talking to. “We gotta lock my interest rate. The Fed’s gonna raise rates tomorrow.”
Or, “Hey, the Fed hiked. How much did that increase my rate?” For people who were out shopping at that time. It didn’t increase the rates at all. Most of the meetings we’ve seen have led to an improvement the days following. Because again, it shows that the Fed from the first quarter of this year that was clueless and was still stimulating the economy while inflation was out of hand, is saying, “we got it. We’re stomping hard on the brakes right now.”
Fed funds right now, they give a range Jeb 4.25 to 4.5, let’s call it 4.5%. The futures markets project a peak of 5% between May and September of 2023. So that’s telling us they expect two more hikes of a quarter percent. So we were at .75, .75, .75. We just got a 50 basis point hike. We’re likely to get two more 25 basis point hikes unless the economy slows more than people expect, or inflation heats up and they have to come back and do something even hotter
And already, Jeb, if we look at the futures markets, futures trading, people are betting that by the end of 2023 we see our first rate cut. I don’t know that I would go that far, but that’s what the markets are expecting so far.
[00:14:36] Jeb Smith, Huntington Beach Realtor: I think it’s important to note, when you mentioned earlier about clients reaching out to you about the Fed just raised 50 basis points or what have you, how did that impact my rate? And you mentioned that’s already built in. But what’s not built in is the conversation that happens after that fed meeting when Jay Powell comes on, uh, and speaks for half an hour in front of the media and the media is expecting him to answer a [00:15:00] question in a certain way, and he comes out and says something that the market’s not expecting.
Kind of goes back to what I was saying earlier. You know, if the market’s expecting something, he says something different. That’s the volatility that we’re talking about, and that is what will or could have an impact in the interest rate, right? Because it’s completely different than what the market’s expecting.
So just understand as much as we try to give projections and what we think is going to happen when you have these, I wouldn’t call them black swan events, but when you have events that are completely different than the consensus. That’s where you start to see these big jumps.
And that’s what we saw in the first quarter of last year. You know, the Fed met in March and in March, they basically came out and downplayed what was going on. And then two weeks later came out and basically said, inflation’s a problem, like this is an issue. And that’s when we saw that big jump in rates.
The same could be said for 2023. While we don’t expect that to happen, just understand, a lot of the market has to do with where rates are headed, and we’re gonna talk about that in some more detail here. One other thing Josh, I wanted to touch on too is that, we know that inflation going down a little bit doesn’t financially help you pay your groceries, help get things cheaper, right? It’s still going to be a problem. When we talk about inflation going down, we’re just talking about the year over year calculations, right? We know at the moment core c p I sitting at 6%.
That’s not great but it’s really good compared to 7.7% or wherever the peak was. And so when we talk about inflation going down, we’re just talking about the trend, right? The monthly numbers added up, like Josh mentioned, headed in a downward trajectory. That’s what we’re looking at, right? And we’re not expecting it to hit 2% by the middle of June, but the closer we get to that number, the better it’s going to impact interest rates in a positive way. And we’ll talk about how we expect that to impact housing if we see inflation going down, Josh.
[00:16:56] Josh Lewis, California Mortgage Broker: So, yeah, let’s look at, let’s look at your forecast for interest rates and where are these coming from? What is the belief for the expectation?
So the Mortgage Bankers Association sees rates trending down. They give quarter by quarter numbers and then the number for the end of the year. They think by the Q4 of 2023 we’ll be at 5.2% about a full percent lower than where we are right now. And they basically have forecast a linear trend down. So just imagine a quarter percent lower every quarter until we get to around 5.2.
One of the best forecasters in our industry, with the best historical track record, Barry Habib is on record as saying by the end of the first quarter, he thinks rates are gonna be close to 5%, and that’s not just a number pulled out of thin air.
I don’t know that we get there that quickly, but my educated opinion would be that by the middle of year we’re somewhere in that 5% range. Where would that come from? Inflation is under control. We’ve seen the peak in the 10 year treasury, 10 year treasury continues to go down.
We get a 10 year treasury somewhere in the range of 3%. We also see moderation towards the historical spread between 10 year treasuries and mortgage backed securities. That’s normally about 1.7 to 2%, and in the last year, because no one wants mortgage servicing rights because everyone believes those loans are gonna pay off real quickly when rates do moderate.
We saw that spike all the way up to 3%. So a 10-year treasury at 3.9 was getting you a 6.9% interest rate. If we get the 10 year treasury at three and we moderate to the high end of normal at like 2% spread versus 10 year treasuries, that gives you a 5% mortgage rate. Absent inflation surprising everyone and not moderating into next year we’re gonna see a 3% 10-year treasury, mortgages in the plus or minus 5% range by mid-year.
[00:18:41] Jeb Smith, Huntington Beach Realtor: Good stuff. Let’s talk about home sales and then we can kind of get into how interest rates are gonna impact home sales and home prices and all of that. We can save that to the end as the finale. if you will. Cause I think that’s a good ending.
[00:18:52] Josh Lewis, California Mortgage Broker: The grand finale.
[00:18:53] Jeb Smith, Huntington Beach Realtor: Yeah, the grand finale. One thing we’ve seen that’s made major headlines is the fact that home sales are down considerably. We’re going from 2020 when we had 5.64 million home sales. 2021, we were at 6.12. 2022, we’re gonna end the year somewhere around 5.13
- The National Association of Realtors is projecting 4.78 million. So you see the trend, right? The trend is going down. The number of home selling is going down and it’s a scary headline, right? Nobody’s buying houses.
The number of homes is declining. And what I would ask as a buyer out there looking to buy a home, somebody that’s decided that you wanna become a homeowner, don’t pay attention to the media and these home sales numbers and some of the stuff. And the reason for that is because for one of the way they’re calculated, a lot of these calculations, uh, are done year over year.
Understand when you’re comparing it to really, really hot years and then they’re doing year over year calculations, the numbers look even more scary. And on top of that, the data [00:20:00] is two to three months old in a lot of cases. The data is lagging, when it comes to some of these projections.
So, you know, they’re gonna compare January o of 2020, three to January of 2022. And we had a really hot first quarter. Anybody that bought a house in the first quarter, was trying to buy a house in the first quarter of 2022, knows the type of market we were in. It was the hottest market I’ve ever been in.
And, and I’ve been doing this almost 20 years, and I thought 2021 was crazy. The first quarter of 2022 was absolutely insane. So when you start comparing these numbers, year over year, month over month, whatever, it’s not going to look great, right? Just because of, of how they use them.
But understand the housing market is going to be slower. There’s less sales happening. And a lot of it has to do with affordability because interest rates went up so much and home prices haven’t dropped nearly as much as a lot of people wanted. As some expected. You haven’t seen that affordability metric come back quite as much and therefore there’s less people out there that can afford homes.
There’s less people out there willing to sacrifice maybe the super low interest rate that they’ve already locked in on a property, willing to make that change for a more expensive property at a higher rate. So people are staying put and because. There’s less transactions actually taking. So Josh, how do you feel?
I think this is probably a trend that we’re gonna see, 4.78, it’s hard for me to dictate that number, right? Because those numbers when you start talking about four and 5 million homes, We really have no idea what the actual number is. Now, the National Association of Realtors has more specific data where they can dive into to some of these specifics, but I would say for sure the number of sales is going to moderate, and that’s likely to be a trend I would say not only for 2023, but potentially even 2024 compared to the last couple of years. just because of housing affordability and rates likely not going back to the lows that we saw.
[00:21:57] Josh Lewis, California Mortgage Broker: Yeah, Jeb, I would agree with you on that. And the funny thing is the Mortgage Bankers Association does project out three years and they think 24 and 25 will be back up over 5 million. I’d like to see the fuel that gets us there.
But let’s look at these numbers. I’m a numbers guy. I do mortgages. Jeb gets to a look at the pretty houses and show, show them and write contracts and negotiate and that fun stuff. I sit here and just geek out on numbers. But look at the average number of sales from 2010 to 2021. Our most recent normal market post crash was 5.13 million.
So we have, you mentioned the NARS projection at 4.78 million. The Mortgage Bankers Association is lower than that at 4.51 million. Redfin came out with 4.3 million and that’s their base case. What they think is most likely, they have a best and a worst case. Also, their best case is I think above the MBA’s figure, but lower than the NAR’s.
So I think it’s pretty safe to say we’re gonna end up above 4 million and under 5 million. If we look at that, home sales have only fallen under 4,000,000 two times in the last 12, 15 years, and the two years make a lot of sense. 2008 home prices were dropping like a rock. Affordability was improving. Rates were coming down. Prices were coming down, but no one wants to catch a falling knife. So no one’s buying, right?
We also saw it in 2010 because in 2008 to try and stabilize home prices, the government had given a home buyer credit, and that expired in 2010. So we talked about the subsidized interest rates of 2020 and 2021, pulling demand forward, that tax credit, basically the government giving you money to buy a house, pulled demand forward.
So 2010 should have looked better than 2009. It ended up being worse and those numbers were just a hair under 4 million. So don’t see that happening by any stretch of the imagination, especially if interest rates continue to moderate.
[00:23:43] Jeb Smith, Huntington Beach Realtor: Well, and I think that’s an important thing to know, right? So what could cause these numbers to change significantly? One thing is you could see home sales go much higher than any of the projections that we just mentioned if interest rates were to go a lot lower than any of us are expecting now, because again, that’ll pull some of that demand forward. It’ll get p people off the fence. It’ll get buyers back in the market.
On the other side, if interest rates shoot to the moon, right? Then you could see that the opposite. You could see the sales actually drop below that 4 million again. But I think in all reality, based on where we think the market is headed, where we think inflation and interest rates are.
The numbers, in the 4 million, mid 4 million range, four, 4.5 to 4.75 is probably a realistic number just based on the economist and the people that are projecting these numbers. But a lot of it has to do also Josh, with inventory, with buyer demand. It’s a weird time in the market for a couple of reasons, right?
For one, the Fed has reached their peak, pretty close to the peak in where they see the Fed funds going. Now I realize that they’ve projected over 5.1 and we’re currently sitting at four and a half. So there’s definitely still some room to move there but what I mean is, reached the end of the year, right? The last quarter of the year [00:25:00] is when we saw interest rates come back the most.
But we also saw most of the inventory that had been added to the market. A lot of markets have shed that inventory, right? They’ve lost that inventory month over month. Now, year over year, a lot of markets are obviously still a lot higher than they were in 2021, but a lot of market shed inventory in that last quarter of the year because of seasonality.
And we’ve had this slowing in the market for one because of seasonality. So it’s really kind of tough at the moment to figure out what the real impact is on some of this stuff because we’re getting back to that historical pattern with regards to the real estate market. And for most markets, not all markets react the exact same, but a lot of markets towards the end of the year is when you see the lowest levels of inventory, right?
People are just less willing to sell their homes, have people walk through ’em. On top of that this year, you’ve had the affordability play, you’ve had all of these different things happening all at the same time, which is keeping homes off the market, sellers being locked into super low interest rates.
But one thing that could help the market move forward, move higher and or potentially stall, is inventory. And so the first quarter of the year is gonna be a really good indicator as to what we’re going to expect, I think, with regards to inventory. Because, sometime around mid-February is when we start to see inventory come to the market in a lot of major markets out there. A lot of people call it the spring selling season.
And this is when the majority of transactions that happen in a year typically happen during this first five to six months of the year. And it usually starts around February and peaks sometime in July. And right at the beginning of August before the kids had back to school.
So Josh, I think as we head into 2020, the real story, as we’ve discussed, is inflation and interest rates. But what happens with inventory, I think will decide a lot because if inventory stays super low, that provides more stability to house prices because there’s just less people out there willing to sell their properties, less people willing to let them go at whatever price or what have you, which we could talk about in more detail if you want.
But if we see, a lot of inventory come to the market at once. That, in a way, can actually drive prices downward a little bit more. So I think, in my expectation of what’s gonna happen is I think you’re gonna start to see some sellers come to the market in February, and you’re gonna have people kind of testing the market a lot like we’ve seen in the last half of 2022.
Putting their homes on the market at a price that they feel is fair and reasonable. Some people obviously will be higher than that and, and crazy in what they want to get, but that will figure out the direction of the market as interest rates hopefully moderate in the first quarter.
[00:27:50] Josh Lewis, California Mortgage Broker: Jeb, you said something important there. Year over year figures are important, but remember the baseline effect. We’re coming off a very high baseline from last year, but we go into the season, inventory is going to increase. There will be more sellers, but the absolute level of sellers is going to be depressed by the high level of interest rates.
70% of homeowners have an interest rate below 4%. So if you’re looking at interest rates, let’s say that Barry Habib is correct, and in the first quarter of next year, we’re at 5%. Who’s gonna give up a three and a half? For a 5%? Who? A very motivated seller. Someone who has an opportunity to buy their dream home. Someone who gets a better job, someone who gets married, someone who has a kid, someone who’s moving across the country. It is going to be motivated sellers.
We kind of have this dance here that lower interest rates will increase demand. We’ll have more willing and abled buyers who can afford to buy a home. It will also increase supply cuz there will be more sellers who will say, I certainly wasn’t gonna give up my three and a half percent rate for a 7%, but I will do it for a 5%. So we’re gonna have this dance. And it tells me going back, It’s going to put a floor under home prices because supply and demand is not outta balance.
We don’t have more sellers than we have buyers. We have a good balance of both and interest rates moderating will increase the levels of both. So we’re looking at more of the same from that perspective. Inventory, you have the absorption portion of it. How many homes come to market? How quickly are they bought?
It’s really just another supply demand measure, balance measure, and it’s pretty darn balanced. You know, we’ve taken a lot of buyers outta the market, but we took a lot of sellers as well. And until we have forced sales, if we get to an economy that’s so bad that people are losing their jobs and despite their very low interest rate, they just cannot make their mortgage payment and they need to access that cash because jobs are gone, whatever the case may be.
Until we have some form of forced selling that brings sellers into the market that have to sell at whatever price the market will bear, it’s going to put a solid floor underneath us and interest rates decreasing will also put a floor underneath us.
So in terms of [00:30:00] inventory, what does it mean? It’s hard to say. We’re gonna have more of it in the spring. The lower rates go, the more inventory we’ll have and the more activity we’ll have. All of that tells us, because we pulled that demand forward, we’re likely to have a ceiling. Like, to me the best case scenario for next year would be 5 million sales. And that would require a big increase in inventory, but also an increase in demand of people to take on those homes when they come to.
[00:30:23] Jeb Smith, Huntington Beach Realtor: Now with that said, Josh, one thing I think we should touch on, that people want to know about is new construction, right? There’s a lot of data out there on new construction, a lot of headlines on new construction that builders have this huge amount of supply coming to the market in 2023, and that is what’s going to essentially, Cause this increase if you will, and that’s what’s gonna cause house prices to drop.
So I think it’s important that we mention new construction, right? There’s about five to six months worth of supply that builders have at the moment that’s currently under construction, that’s going to be hitting the market sometime in 2023. So how do you feel that inventory? Cuz we’re sitting at 3.3 months of supply at the moment.
So 3.3 months of supply. Builders are going to come, they’re gonna add some more supply. We’re gonna have some natural supply come to the market, like you mentioned. What are your feelings on that inventory coming to the market and that having an impact on house prices?
[00:31:19] Josh Lewis, California Mortgage Broker: The thing that is different about new construction versus a traditional seller, existing homes, is that they have to sell those homes. The option is not there to keep it. They can do something like we saw in Houston earlier this year where a builder built a tract of homes and sold it to a hedge fund as rentals. But they have to sell ’em. They have to get ’em off the books. They also behave differently in that they will do everything possible to avoid price cuts.
We had a question on the live show, just, just this Wednesday. Someone saying, what can I do to negotiate with these guys? Because, another one that just gone under contract or just closed at a lower price than he had paid. They don’t want that to happen. As soon as a new sale goes on, the books lower, everyone that bought in there is mad at them, wants to renegotiate if they haven’t closed yet.
So it brings about really different behavior. And what is that behavior? Massive concessions, buying down interest rates, putting in upgrades. Narrowing their margin, but trying to keep that price at top dollar, so it makes new homes more attractive to existing homes who don’t have that same pressure to give those big incentives.
So if you’re in a market that there is a lot of new construction, I don’t necessarily think we’re gonna see huge downward pressure on those prices, but in real terms, it’s sort of like we talk about inflation. You know, if you have a 12 ounce can of Coke for a dollar and they start giving you a 10 ounce can of Coke. That’s inflation.
You’re paying the same, but you got less. It’s the opposite way. With builders, you’re paying the same cuz they want to keep that price as high as possible, but you’re getting more, they’re giving you a better home, a better interest rate, less closing costs. So you’ll see that battle there between new construction and existing homes if that all of that supply comes online as expected.
What we’ve seen Jeb, over the last couple years for supply chain constraints, labor constraints, permitting, the entire process, it’s taking longer for this inventory to come to market. We’ve seen new home permits decreasing. So builders are greedy, but they are not dumb.
They have already put the breaks on their plans going forward. So I wouldn’t put it past them to slow play completion of their inventory to again, put a support under their prices. And if their economists are saying the same thing, Hey, by middle of next year, we expect rates at 5%. Do they want to be buying people’s rates down to 5% when it’s gonna be free later on in the year, and there’s gonna be more inventory.
So there’s not a firm answer there, but those are the pieces that I would be looking at and seeing how they play out in your area, because it varies massively by area. We talk about parts of Texas, we talk to people and 80% of the market is new construction. For us here, we have pockets in Southern California of new construction, but it’s not much of the market at all.
[00:34:01] Jeb Smith, Huntington Beach Realtor: There was an article or a stat going around that Dallas, Texas in, I think it was either 2021 or 2022, the City of Dallas built more homes than the entire state of California. I mean, think about that. It’s crazy and a lot of it has to do with the regulations and the cost to build in California.
But when you have areas that are producing that many new homes, those markets are going to get impacted a little bit more than areas that don’t have quite as much new construction. And earlier you mentioned Houston, building You know, these communities and then selling ’em off to like hedge funds.
I saw an article recently Lenar, they were looking to sell 4,000 homes or something crazy to one investor that would eventually turn these things into rentals. You can choose to buy, you can choose to rent. You don’t have to do either. It’s just, it’s all about educating yourself in the process and understanding the potential outcomes.
Josh, let’s summarize here. We promised at the beginning we got three scenarios. So let’s talk about worst case scenario, then we can talk about best case scenario. And I think, we’ll end with somewhere around [00:35:00] middle of the road with what we expect to happen in 2023.
So where do you think worst case scenario is with 2023?
[00:35:07] Josh Lewis, California Mortgage Broker: Your worst case scenario is an increase in interest rates from where we’re at. That that 7% wasn’t a peak, that that was just a preview, and you end up seven and a half, maybe even 8%. And what would that do? It would push home sales nationwide under 4 million. That would be enough to get us under 4 million.
So you would see very few homes selling. Much higher interest rates and downward pressure on home prices. Under that scenario we’ve just seen it decreases demand to a level that those that have to sell would have to sell at a discount to make the affordability equation work and to make it desirable to buyers.
So you’re talking sub 4 million in sales and you’re talking home price decrease. It’s hard to say, but on a nationwide level, you’re probably talking a five to 10% decrease in home prices. Some of the most over-inflated markets have seen that in the second half of this year, a five to 10% decrease but on a nationwide basis where most markets are not unnecessarily inflated, it would lead to a five to 10% downturn in home prices.
That’s the formula for a decrease in home prices is interest rates going up and the economy worsening and people having less jobs, less well paying jobs and rates would be high because inflation is high, so they have more money going other places. So being able to afford that home or buying a home is just less of a priority.
[00:36:25] Jeb Smith, Huntington Beach Realtor: I think opposite of that, which is best case scenario is interest rates doing exactly the opposite, going lower than expectations, going into the low 4% range, which I don’t think either of us expect to happen.
If you saw interest rates go considerably lower than habib’s 5% by the end of q1. Now, I don’t think it’s gonna happen by the end of Q1 regardless, but if you saw it mid-year, whatever, that’s going to create more buyer demand in the market. It’s going to get more sellers off the fence. It’s gonna create not what we saw in 2020 and 2021, in my opinion.
But, it’s going to increase activity. It’s going to increase the number of home sales, which would get you closer to that 5 million. Potentially even push you over in some cases with the number of transaction happening. It would also. Not only create additional stability in the market, but it would cause house prices to start increasing again, right?
You could see jumps of potentially 5%, 10% in some areas where inventory is low because of this. And it would create the opposite effect. You would have more property coming on the market with regards to inventory, but because of rates being low and giving buyers more affordability and what have you.
That inventory’s gonna get swallowed up and you’re gonna be back in a position where you know that there’s very little to choose from, builders would be back, no longer having to do these incentives. Sellers wouldn’t be having to offer credits, and you could get back into a multiple offer situation.
But I think just like the worst case scenario, probably not likely to happen. So Josh, where do we think the market’s headed? Middle of the road. Is that fair to say.
[00:37:59] Josh Lewis, California Mortgage Broker: Yeah and I think, what is that middle of the road interest rates moderating. If we took an average of the weekly number, whether it’s National Mortgage news, Freddie Mac, the optimal mortgage market index, if we average the weekly or daily rates next year, at the end of the year, we get to the end of 2023.
I think we’re looking at somewhere around 5% for the year. If so, that will keep us somewhere in four and a half million in. And home prices flat to moderately up one, two, 3% somewhere in that range. And if rates don’t quite get to 5%, a little worse than that, if rates get to 4.5%, a little bit better than that.
But I go back and say that interest rates are absolutely going to be the driver of what happens with the market this year. And things at this point in time are looking good for interest rates. Good in terms of moderating and getting back to a level that people are more comfortable with. Jeb, I like to think that I put things just eloquently and perfectly, but I actually have a quote here that I think basically summarizes my thoughts on the market as well as anyone can.
This is from Odeta Kushy. She’s the Deputy Chief Economist at First American Research, and she says, ” Once mortgage rates have peaked, the housing market will likely stabilize, once adjusted to the new normal of higher rates, the housing market will benefit from continued strong demographic driven demand relative to an overall long run shortage of supply. So based on current dynamics, it appears the housing market may be poised to stabilize in 2023.”
I think that’s a pretty good summary of where we’re at.
[00:39:28] Jeb Smith, Huntington Beach Realtor: And I think it’s a great place to end today’s episode. So with that said, we appreciate your support. We appreciate you being here.
We’ll see you soon. Adios.
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