Homebuyers Could Return in Summer 2023 as Stars Begin to Align
Now that 2022 is just about in the rear-view mirror, homebuyers want to know what to expect in the new year. It has been a turbulent housing market of late, with the Federal Reserve having been on an aggressive path to raise interest rates to combat sky-high inflation, the likes of which have not been seen in recent history. Looking ahead, 2023 is a mixed bag in terms of where mortgage rates and the housing market are headed.
All eyes are really on mortgage rates to determine how the real estate market will perform in 2023. The Fed’s strategy has certainly been felt in the real estate market, where the rate on a 30-year fixed mortgage surpassed 7% in the fall of 2022. However, there could be a light at the end of the tunnel.
The Federal Reserve has slowed the pace of its interest rate hikes, taking them to 50 basis points to a range of 4.25-4.50%, as of December 2022. Meanwhile, inflation for goods has begun to ease. Taken together, the stars could be aligning for more attractive mortgage rates in 2023.
The effects of lower interest rates have already begun to be felt in the housing market, strengthening homebuyer demandas of mid-December 2022. Demand has been inching higher of late. Economists predict that if this shift persists, the real estate market can recover in the latter half of 2023.
It’s not all rosy. On the one hand, homebuilders have slowed the pace of home construction due to a market slowdown. However, the improvement in mortgage rates is expected to attract more potential homebuyers to the market in 2023 as home ownership becomes more affordable, thanks to the lower rate environment. On the flip side, over 66% of homeowners have a mortgage rate of less than 4%, which could cause them to sit on the sidelines instead of listing their homes.
Meanwhile, the average on the 30-year fixed mortgage rate was 6.38% as of mid-December 2022. It declined to 6.27% in the week-ended Dec. 21. The pace of the decline in mortgage rates in Q4 2022 has been dramatic, experiencing their biggest declines in the five weeks leading up to Dec. 16 in over 10 years.
While this is still high compared to the pandemic era, when the Fed held interest rates close to zero, it is a step in the right direction. If the Fed keeps rates steady or continues on its path of more moderate increases, mortgage rates could continue to move lower.
Heading into 2023, borrowers have begun to make their way to their mortgage lenders. A recent Mortgage Bankers Association study reveals an uptick of 0.85% in the mortgage composite index for the week ended Dec. 16, vs. the previous week. There was a similar trend in the refinance index, which rose 6% in the same period.
The report reflects three-quarters of U.S. retail, residential mortgage applications in total. The final month of the year is also seasonally slow for homebuying, which suggests that these numbers could start to improve in Q1 2023.
However, housing agency Freddie Mac is cautious about the coming year in real estate. The government-sponsored enterprisepredicts the 30-year mortgage will hover at an average of 6.4% in 2023, up from an average rate of 5.4% in 2022.
Other industry predictions are more optimistic. Research from the National Association of Realtors (NAR) suggests that as of mid-December 2022, mortgage rates have seen their peak and are heading lower. However, NAR economists also warn that the market will not see 3% mortgage rates in the foreseeable future and is eyeing 5.5% for year-end 2023. According to NAR, mortgage rates will finally dip below 6% in Q3 2023.
If a recession is ahead for the U.S. economy, which remains a wildcard prediction at this point, this could also result in lower interest rates in 2023. This could also fuel a wave of refinancings. Experts advise homeowners to pursue a long-term mortgage refinancing if they could lower the ratebetween 0.375 and 0.50.
There’s no denying that home sales tumbled in 2022, with 10 consecutive months of declines through November. However, with refinance demand beginning to creep higher and rates starting to ease, homebuyers could decide to dip their toes back into the housing market in 2023.