Articles

As temperatures continue to sizzle, the housing market continues to fizzle, with blisteringly high mortgage rates and scorching home prices becoming too hot to handle for many would-be home buyers.

The national average 30-year fixed mortgage rate blasted through 7% in mid-August, reaching a 2023 high of 7.23%. As of September 7, the average 30-year fixed mortgage rate stands at 7.12%, according to Freddie Mac.

Meanwhile, year-over-year existing monthly home sales sagged in July for the second consecutive month, slipping by 2.2% to a six-month low, with all four major U.S. regions posting year-over-year sales declines, according to the National Association of Realtors (NAR).

Despite ultra-high mortgage rates and home prices, the market remains as competitive as ever, thanks to demand levels surpassing the ongoing inventory crunch and homeowners who locked in low interest rates staying put. These and other factors perpetuate the perfect affordability crisis storm that continues to sideline many aspiring homeowners.

Housing Market Forecast for September 2023

Housing market activity remains weak overall thanks to high mortgage rates, elevated home prices and constrained housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis. At the same time, high inflation and more interest rate hikes still hang in the air.

Mortgage rates took off in mid-July and hardly looked back with the average 30-year fixed rate peaking at 7.23% the week of August 24. This rate is the highest since March 2022 and comes in the wake of Federal Reserve policymakers voting to raise the federal funds rate by 25 basis points at the committee’s July meeting—the 11th rate increase since the Fed began its inflation battle in March 2022. A basis point is one-hundredth of one percentage point.

The federal funds rate is the rate financial institutions lend to each other overnight.

A Fed rate hike indirectly impacts long-term home loans, such as 30-year, fixed-rate mortgages. The federal funds rate hovered near zero in March 2022 when the Fed began raising rates. After 11 rate hikes, the rate range is currently 5.25% to 5.5%.

And the Fed has continually signaled it will not stop there.

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Federal Chair Jerome Powell stated in his remarks at the Federal Reserve’s annual Jackson Hole summit last month.”Two percent is and will remain our inflation target.”

Will They or Won’t They? Fed Leaves Door Open for Another Rate Hike

Average 30-year fixed mortgage rates escalated steadily this past month in the wake of the Fed’s 25-basis-point rate bump in July.

Fed projections suggest the terminal federal funds rate will reach 5.6% by the end of 2023, implying at least one more rate increase this year. Consequently, many experts forecast mortgage rates remaining well above 6% for the remainder of this year.

In the meantime, all eyes are on the Fed’s September 19-20 meeting where committee members will review the latest economic data to inform its monetary policy stance and consider whether they’ll keep rates steady—or raise them.

How Will the Fed’s Interest Rate Decision Affect Mortgage Rates?

“Right now, it’s more about what the Fed intends to do rather than what it does,” says Keith Gumbinger, vice president at mortgage website HSH.com. “[W]hile not meaningless, another quarter-point hike at this point won’t change the big picture much, as a lot of the ‘damage’ from higher interest rates is either done or is already in process.”

Gumbinger also says that what matters most is what policymakers reveal about how long they plan to keep rates elevated and when rate cuts are in store.

When Will The Housing Market Recover?

For a housing recovery to occur, Gumbinger says several conditions must unfold.

“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Gumbinger says. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”

And, of course, interest rates would need to cool off.

But Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.

“Better that rate reductions happen at a metered pace, incrementally improving buyer opportunities over a stretch of time, rather than all at once,” Gumbinger says.

He adds that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also help the housing market, over time, return to 2014-2019 levels.

Yet, Gumbinger predicts it could be a while before we return to those rates.

Where Do Mortgage Originations Currently Stand?

With the average 30-year fixed mortgage rate sitting comfortably above 7%, a 5% mortgage rate seems like a distant dream.

Despite elevated rates, mortgage originations trended up in the second quarter of 2023 to $393 billion after amounting to only $344 billion in the first quarter—the lowest total since the second quarter of 2014.

Even so, housing experts expect originations will remain muted through the rest of 2023. Existing-home sales were down a whopping 16.6% from July 2022, per NAR. Save for a slight bump in April, year-over-year home sales have trended down markedly since February of this year. Pending home sales—a bellwether for existing-home sales—showed a meager gain of 0.9%.

“The small gain in contract signings shows the potential for further increases in light of the fact that many people have lost out on multiple home buying offers,” said Lawrence Yun, chief economist at NAR. “However, rising mortgage rates and limited inventory have temporarily hindered the possibility of buying for many.”

Even so, Yun sees some light at the end of the tunnel.

“Home sales are essentially bottoming out this year … before [an] anticipated upturn going into next year,” said Yun during the trade organization’s real estate forecast summit. “But this is contingent on mortgage rates falling.”

Today’s mortgage spread—the gap between the 10-year Treasury bond yield and the 30-year fixed rate mortgage—is around 300 basis points. Given historical trends, the spread should be between 150 and 200 basis points. In anticipation of the spread normalizing, Yun predicts mortgage rates will fall to around 6% by the end of 2023.

Housing Inventory Outlook for September 2023

Housing supply remains at near historic lows—especially entry-level supply—consequently propping up demand and sustaining higher home prices.

Even so, new single-family homes have been coming to the rescue—at least to some extent—enticing eager shoppers frustrated by the limited resale inventory. Moreover, the price gap between the median existing-home sales price and new home sales price has closed markedly in recent months, another incentive luring home seekers.

Existing Homes

There was a speck of good news for inventory on the resale side—most likely due to home seekers either leaving the market or turning to new construction.

Existing inventory has stalled at record lows for months. After a flat June, inventory of unsold, existing homes increased by 3.7% between June and July. Yet, this only bumps existing inventory from a paltry 3.1-month supply to a 3.3-month supply at the current sales pace. Many experts say a balanced housing market has four to six months of inventory.

Meanwhile, at the current sales rate, the seasonally adjusted estimate of new houses for sale was 437,000 at the end of July, representing 7.3 months of supply at the current sales pace, down from 10.9 months of supply a year ago.

“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group. “We think that it is highly unlikely that the inventory problem will be resolved in 2023,” Macdowell says.

New Homes

Despite mortgage rates holding firm above 6.75% in July, new home sales rose 4.4% to a seasonally adjusted annual rate of 714,000 compared to a rate of 684,000 in June.

Another metric revealing that new homes are having their moment was the 35.5% year-over-year increase in July of new home purchase mortgage applications, according to the Mortgage Bankers Association.

FHA-insured loans are an increasing share of those new home purchase applications. The share of new home sales backed by FHA loans rose from 12.1% to 14% in the second quarter of this year, according to National Association of Homebuilders (NAHB) analysis. FHA loans are popular with low- to moderate-income borrowers and first-time home buyers because of the lower credit score and down payment requirements.

“With low existing home inventory, new home inventory is becoming competitive, and new homes are now competitive on price,” said Robert Frick, corporate economist with Navy Federal Credit Union, in an emailed statement.

In October 2022, the median sales price for a new home was $496,800, while the median existing-home sales price was $378,800—a difference of $118,000. The gap now is only $30,000.

The median new home sales price in the U.S., which dipped to a 2023 low of $417,200 in April, has since been on the rise amid persistent demand. In July, the median sales price for a new home leaped to $436,700, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).

Year-over-year new home sales are also on a tear, surging by 31.5%, even as existing-home sales continue to sag.

Housing Starts Forecast for 2023

There were mixed messages in the construction realm, suggesting some home builder wariness amid escalating mortgage rates and other industry challenges.

Single-family construction starts jumped up by 6.7% following a dip in June. Applications for building permits rose 0.6% from the previous month, according to the Census Bureau and HUD.

At the same time, builder confidence took a nosedive following seven months of increases.

The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment sank from 56 to 50. A reading of 50 or above means more builders see good conditions ahead for new construction.

Thanks to mortgage rates back on the upswing, builders returned to offering incentives in August as a dangling carrot for home seekers, with 25% of builders offering sales cuts compared to 22% in July. More builders also offered incentives to spark sales, up 3% between July and August.

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” Alicia Huey, chairman of NAHB, said in a press statement.

Builder headwinds also include tighter credit conditions due to the Fed’s aggressive interest rate hikes to curb inflation. Experts foresee a negative impact on the pace of home building.

“Long-term interest rates that affect residential financing costs are rising again, putting a speed limit on the recovery of single-family construction,” said Bill Adams, chief economist at Comerica Bank, in an emailed statement. “Home builders are decreasing the sizes of new units they build to try to make new construction more affordable.”

Affordability Struggles Sideline Hopeful Home Buyers

If now doesn’t feel like the right time to buy a home, you’re not alone.

In fact, you’re among the 82% of consumers who reported putting home buying plans on hold, even as they say that they feel their job and income are stable or better than a year ago, according to the Fannie Mae Home Purchase Sentiment Index (HPSI).

Thanks to escalating mortgage rates and still-high home prices, homeseekers on $3,000 monthly budgets who could have purchased a $500,000 home a year ago, can only afford a $429,000 home today, according to a recent Redfin report.

First-time buyers hoping to land a home at a lower price point generally have it the worst.

Starter home costs continue on an upward trajectory that has put homeownership further out of reach for those already constricted by limited down payment savings and incomes that can’t keep pace with costlier monthly payments, according to Realtor.com data.

For example, monthly mortgage payments in Wichita, Kansas have exploded by 271% since 2019. It’s a similar story in many areas of the country that historically have been more affordable.

Weakening affordability conditions for first-time buyers is further underscored in NAR’s latest First-Time Homebuyer Affordability Index. The preliminary second-quarter reading came in at 61.4, compared to 67.4 in the first quarter. A reading of 100 indicates that a family earning a median income earns exactly enough to qualify for a mortgage and afford a typical home.

In other words, the typical first-time home buyer is nowhere near earning the level of income required to afford a home.

Are Home Prices Beginning to Drop?

Despite signs that home prices are beginning to weaken in some regions, the housing affordability crisis is likely to perpetuate thanks to a meager housing supply, persistently high mortgage rates and sales prices that are flirting with the June 2022 record-high median existing-home sales price of $413,800.

The median existing-home sales price slid to $406,700 from $410,200 between June and July, but increased 1.9% from a year ago, according to NAR.

First-time home buyers hoping to buy a starter home will need to earn about $64,500 a year—that’s 13% more than a year ago, according to a Redfin report. A typical starter home hit an all-time high of $243,000 in June.

Those earning $75,000 a year can afford a $256,000 home, yet homes at this price or less accounted for only 23% of the existing home listings in April, according to a Realtor.com and NAR Home Affordability & Supply Report.

Will the Housing Market Crash in 2023?

Home prices overall remained resilient between April and June, even as mortgage rates crept higher, according to the latest S&P CoreLogic Case-Shiller Home Price Index.

The U.S. National Home Price nonseasonally adjusted (NSA) index reported a zero year-over-year change and marginal month-over-month increases. This is the fifth consecutive month of increases, reflecting a housing climate in which prices remain impervious to home affordability challenges.

Still, this reading precedes the period when the average 30-year fixed mortgage rate escalated rapidly, crossing over the 7% mark. Nevertheless, that threshold may not turn out to be a potential tipping point.

”While home prices have remained strong in 2023, elevated mortgage rates complicate the situation for potential home buyers, a trend that will likely constrain additional price gains for the rest of the year,” said Selma Hepp, chief economist at CoreLogic, in an emailed statement. “Nevertheless, home prices are still expected to reaccelerate and reach mid-single-digit growth rate by the end of the year, according to CoreLogic’s latest HPI forecast.”

Stark differences continued at the regional level, with last month’s winners still leading the pack.

“Home price acceleration is most notable in markets that remained relatively affordable throughout the pandemic and saw less volatility from household migration, such as those in the Midwest and New England,” said Hepp.

Hepp also pointed out that these markets are now starting to catch up with the pricier ones.

“June’s three best-performing cities were Chicago (+4.2%), Cleveland (+4.1%) and New York (+3.4%)—the same three that had topped our May leader board,” said Craig J. Lazzara, managing director at S&P DJI, in the report. “The Midwest (+2.8%) continues as the nation’s strongest region, followed this month by the Northeast (+1.6%).”

On the flip side, home values continued to plunge in West Coast pandemic boomtowns, with San Francisco (-9.7%) and Seattle (-8.8%) at the bottom. The West overall (-5.9%) remained the weakest region.

Despite some areas seeing price declines, the likelihood of a housing market crash—a rapid drop in unsustainably high home prices due to waning demand—still remains low. Experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes.

“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow.

Will There Be a Lot of Foreclosures in 2023?

Foreclosures continue to trend down month over month, according to a recent report from ATTOM, a property data provider.

In July, foreclosure filings were down 9% from June but up 5% from last year, according to ATTOM. Foreclosure completions were up 4% from the previous month and up 9% from a year ago.

“The slight decline in foreclosure filings we are seeing is yet another sign of a rebounding housing market,” said Rob Barber, CEO at ATTOM. “With home prices back up, several factors have combined to put more financial resources in the hands of homeowners, providing more options to avoid foreclosure.

However, Barber hesitated to predict whether the trend would continue given the ongoing unpredictability of the housing market and economic forces at play.

The five states with the highest number of completed foreclosures—real-estate owned properties (REOs)—in July were, from highest to lowest, Illinois, Pennsylvania, California, Michigan and Texas.

While foreclosure rates are up year over year, experts still do not expect to see a wave of foreclosures in 2023. Some 49% of mortgage-owned residential properties in the U.S. were equity-rich in the second quarter of 2023, according to an ATTOM report. In other words, the combined estimated market values for those properties were worth at least double the estimated loan balance amounts, providing homeowners a safe cushion from foreclosure.

When Should I Buy a Home in 2023?

Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.

Use a mortgage calculator to estimate your monthly housing costs based on your down. But if you’re trying to predict what might happen next year, experts say this is probably not the best home-buying strategy.

“The housing market—like so many other markets—is almost impossible to time,“ Divounguy says. “The best time for prospective buyers is when they find a home that they like, that meets their family’s current and foreseeable needs and that they can afford.”

Gumbinger agrees that it’s hard to tell would-be homeowners to wait for better conditions.

“More often it seems the case that home prices generally keep rising, so the goalposts for amassing a down payment keep moving, and there’s no guarantee that tomorrow’s conditions will be all that much better in the aggregate than today’s.”

Divounguy says “getting on the housing ladder” is worthwhile to begin building equity and net worth.

Tips for Buying in Today’s Housing Market

Even as prices soften, you may realize that the area where you want to buy a home is still out of reach, so it’s important to be flexible.

“If you badly want a house and can work remotely or switch jobs, moving to lower-priced housing markets is a good idea to consider,” says Frick. “Millions of Americans have done that already.”

Also, get all your ducks in a row in advance—review your financial situation, gather required documents, shop multiple lenders and strengthen your credit score. That way, when you find your dream home, you’ll be in a better position to act fast in a tight market.

“Only the best prepared, with their financing lined up, a solid understanding of what they can afford, and constant checking of prices and listings will be successful in today’s highly-competitive market,” says Frick. “Know how much your monthly payment will be—complete with taxes—and how well that fits into your budget.”

Getting to know a local real estate agent where you’re hoping to buy can also potentially give you a crucial edge in a tight housing market.

Tips for Selling in Today’s Housing Market

“Sellers should make sure to work with an agent in order to get their pricing right,” Divounguy says.

Divounguy adds that homes that are priced right are the ones that get the competition while others linger on the market.

He also advises sellers to take steps sooner rather than later to get their houses ready to sell.

“The top regret we hear from sellers year after year is that they wish they started prepping their home for sale sooner,” Divounguy says. “And don’t neglect your online curb appeal.”

Divounguy also advises sellers to include a 3-D home virtual tour or an interactive floor plan in their listings. He reports that listings that utilize these virtual tools on Zillow get 69% more page views and 80% more saves.