22) 2023 Housing Outlook
The housing market benefited the most from lower interest rates, but once rates started tightening, housing started heading downward. If you assume a 20% down payment, the rise in mortgage rates and home prices since December 2021 amounts to a 52% increase in monthly payments on a new 30-year mortgage for the median existing home.
In addition, existing homeowners that are sitting on low fixed-rate mortgages are reluctant to sell since a new mortgage will be at a much higher rate. Even if the actual market price of my home is lower, I would want more money to compensate for the higher mortgage. I would rather not sell and just sit on my house for another couple of years.
New home sales are also down substantially since the COVID peak, but should find a bottom sooner. The key is that with a new home, the seller is a contractor, so there is no concern about an existing mortgage vs a new mortgage. Also, housing has been underbuilt in the previous decade. The average price of a new home will likely fall in the short term but will start rising in the long term due to a supply shortage.
With the labor market tightening as employers see recession headwinds, most workers will want the security of their existing position rather than trying for a new position which will only limit the number of homes listed for sale. Promotions and advancements will also slow down as companies tighten their belts limiting workers from upgrading to a larger, more expensive house.
We don’t expect housing to begin to recover until late 2023 or early 2024.
As inflation and rising credit card debt eat into budgets, families will start putting homebuying onto the back burner and will prefer renting over purchasing as apartment rents are significantly lower than mortgage payments.
According to Marcus & Millchap, during the second half of 2022, the average monthly income of a Class A renter was about $10,000, compared to $8,100 in the same period of 2019. Barriers to entering the single-family home market are encouraging more affluent residents to choose high-end apartments. This could produce longer-term tailwinds for Class A apartment demand, once the economy is back on solid ground.