Many prospective home buyers have been waiting for real estate prices to fall in the hopes of finally being able to afford their own homes. And the current outlook has raised expectations even further. However, falling prices don’t necessarily mean that the tides are turning completely. So that leaves us with two burning questions: are home prices dropping in 2023 and are market conditions improving? Read on to learn more.
What Is the Current State of the Housing Market?
Housing continues to be a problem for both renters and buyers alike. Median home prices have skyrocketed, reaching an all-time high in June 2022 with a national average of $413,800. This shows a 45% increase from pre-pandemic home prices in December 2019 and more than 13% from the same month the previous year. These rising rates mark a period of unprecedented growth that simply isn’t sustainable. The increase in the cost of housing has far outpaced wage growth, meaning that many people can’t afford the homes that are available.
Fortunately, these escalating conditions seem to be cooling off. By December 2022, the national median home price had fallen to $366,900. Although this has been a positive sign of changes ahead, many analysts are still maintaining a watchful eye. Since the housing market is largely dependent on outside economic factors, it’s difficult to know what 2023 has in store.
What Factors Are Affecting the Market?
While some analysts are still wary to weigh in, most can agree that the recent decline in home prices is the market attempting to correct itself. However, the housing market is notoriously fickle and is influenced by several factors.
Limited Inventory
First and foremost is the availability of homes for sale. Although more homes are coming onto the market, inventory remains limited. There was already a housing shortage even before the pandemic began. However, demand still remains high as many have been waiting for market conditions to improve before buying a home. Unfortunately, the supply has struggled to keep pace. In addition to people staying in their homes longer, fewer new homes are being built. Furthermore, those who received low mortgage rates before the recent increases are reluctant to sell unless they have to. While more homes are being listed than in the previous two years, there simply isn’t enough inventory to meet buyers’ demands.
Higher Interest Rates
Another important factor to consider is how inflation has affected the cost of living and interest rates. Even though it has come down a bit to 6.5%, the inflation rate remains much higher than usual. So in an effort to combat these higher numbers, the Federal Reserve started raising interest rates. Currently, the average interest rate on a 30-year fixed mortgage is around 6.63% while a 15-year fixed mortgage has a rate closer to 5.95%. Many market analysts have taken this as a good sign that rates are leveling off. However, some experts foresee the rates increasing closer to 8.0 – 8.5% by the end of 2023. Either way, the steeper interest rates have scared off many potential buyers who prefer to hold out until the market stabilizes.
Larger Economic Concerns
But ultimately, one of the greatest issues affecting the housing market has been the fear of a recession. With several large companies announcing widespread layoffs and hiring freezes, it leaves many people questioning their job security. With this level of financial uncertainty, people don’t want to commit to buying a new home with looming questions of affordability and serious economic concerns.
Are Home Prices Dropping in 2023?
The combination of factors has slowed home-buying activity across the country. And if the Federal Reserve continues to raise interest rates, mortgage financing will become even more expensive, making housing less affordable. So in an effort to reinvigorate buyers’ interest, there has been a large wave of price cuts in the homes that are listed on the market.
Some cities have already seen drastic reductions in recent months. Average home prices in San Francisco have decreased by 10.36% over a three-month period. Meanwhile, Seattle has seen a 9.55% reduction, and San Diego prices decreased by 7.24%. But, it’s important to remember that these cities had some of the most expensive housing markets in the country. Therefore, they have further to fall than other markets with fewer supply constraints.
However, most experts don’t believe that a crash is imminent. Economists with the National Association of Realtors anticipate widespread price declines. Although the rate will vary from market to market, Morgan Stanley has gone as far as to predict a 10% drop in home prices by June 2024. This is consistent with most opinions that there will be modest declines at the national level. The senior analyst from Zillow said it will be a slow process, so “you’re not going to see that huge price adjustment that everyone is hoping to see.”
What Do Buyers Need to Know?
So if you’re wondering, “are home prices dropping in 2023?”, it seems that the general consensus is that they will. But, there is still contention over how much prices will fall.
Those who are still set on buying a home this year should keep a few things in mind as they start the search process:
- Limit your housing cost is no more than 25% of your monthly budget. This should include your mortgage, interest, property tax, insurance, HOA fees, maintenance, and repairs.
- Try to save for a larger down payment. Ideally, you want 20% to avoid private mortgage insurance. However, the more you have for your down payment, the smaller your mortgage and interest fees will be.
- If possible, choose a 15-year fixed-rate mortgage to save you more money. Choosing this type of mortgage will save you tens of thousands of dollars in interest and fees and help you pay off your debt faster.
Although it’s possible to do this on your own, enlisting the help of an experienced agent can help you avoid a bad investment and find the right home for you.
Read More
- Crying Over the Housing Market: Why Millennial and Gen Z Buyers are Struggling
- Shifting Real Estate Market Offers Renters Opportunity to Become Home Buyers
- 5 Methods to Manage Your Mortgage During Inflation
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