January 3, 2023
After two years of runaway home prices, the Federal Reserve stepped in to reverse engineer rampant inflation and has been utilizing the housing market as one of the main economic engines to achieve its objective. They increased the Federal Funds Rate from nearly 0% at the start of the year to 4.5% in December, its highest level since 2007 and its fastest rise in more than 40 years. Long-term mortgage rates responded rising from 3.25% at the start of the year to over 7.25% in October, more than doubling. They eased below 6.5% in December as inflation numbers began to improve for the second consecutive month. Yet, inflation remains elevated, up 7.1% year over year through November. It hit 9% in June. Core inflation, less the volatility of food and energy, is currently at 5.96%, after reaching 6.7% in September. The Federal Reserve’s core inflation goal is 2%, so they have a long way to go. The overall United States economy has remained resilient backed by a very strong labor market, sky-high job openings, low unemployment, and increasing consumer spending. Yet, the high-interest rate environment has been rocking the financial markets. The unrelenting Federal Reserve policies will eventually instigate an economic recession in 2023 that will most likely begin by mid-year. As a result, the local housing market is going to be subdued in 2023, especially in the first half of the year. Here is the forecast:
The bottom line: 2023 will continue where housing in 2022 left off, extremely sluggish. Housing is particularly interest rate sensitive, where even with anemic, low inventory levels, values will still drop due to severe affordability issues. Values will stop retreating only when mortgage rates drop below 5.5%, instigating more demand and more homeowners to stop “Hunkering Down” and list their homes at a more normal rate. The housing market is no longer insane, homes are for the most part not selling above their asking price, not selling immediately, not selling with multiple offers, and there is far less activity and buyer competition.
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