The real estate market experienced significant change in the second half of 2022. Some say it was a welcome change, while others believe it was the beginning of a crisis. In 2023, some experts predict a market crash, while others predict a more normal and stable market. In this article, we discuss our 2023 real estate predictions.
Mortgage Interest Rates Will Stabilize In The 5-6% Range
One of the most important factors driving the recent real estate market is the mortgage interest rate. Over the past few years, record-low interest rates have caused a surge in demand in the market, resulting in record-high year-over-year increases in prices. The second half of 2022, however, saw mortgage interest rates more than double, going as high as the 7% mark for the average rate on a 30-year fixed loan. This was largely caused by the Federal Reserve’s aggressive hikes to the target interest rate in its efforts to stifle record-high inflation.
The end of 2022, however, saw improvements to inflation, and as a result more moderate rate hikes by the Federal Reserve. The impact on mortgage interest rates was a slight decline and stabilization around the 6% mark.
Given that the Fed started aggressively raising that the rate in mid-2022, one can expect to see decreased inflation in 2023 as a result of those rate hikes. Assuming that happens, the Fed will likely stay the course with moderate rate hikes, which have largely already been “baked into” the mortgage market, meaning mortgage rates will remain relatively stable.
We expect the rate to stabilize in the 5-6% range. If inflation improves more than expected, that range could be even lower, although it could conversely be higher if the Fed decides to take a more aggressive approach with the target interest rate.
Improvement In Buyer Sentiment
Buyer sentiment, or buyer confidence, was another major factor behind the slowing real estate market in the second half of 2022. This was also driven largely by mortgage interest rates. As noted above, 2022 saw a dramatic increase in the average rate on a 30-year fixed loan. At the beginning of the year, rates hovered around the 3.5% mark. By October, they had doubled to over 7%. Toward the end of the year, they had declined to just over 6%.
The result was uncertainty in the market and reluctant buyers. With rates quickly jumping from 3.5% to over 7%, many buyers were understandably nervous about investing in the real estate market, especially with some experts predicting rates would go as high as 10%. Even as rates cooled, buyers remained nervous about the state of the market.
We expect that buyer confidence will increase as the market stabilizes in 2023. As doomsday predictions are proven wrong and the interest rate market becomes more predictable, we expect buyers will return to the market. This will be particularly true of buyers who see the value of their investments in the stock market increase in 2023. Predictability typically results in more confidence, and we expect more predictability in 2023.
Continuing Low Supply
The end of 2022 also saw a precipitous drop in the number of new listings. In the 4th quarter of 2022, new listings in Los Angeles County were down by approximately 25% as compared to 2021. Among other reasons, this was caused by uncertainty in the market, as well as homeowners with rates locked at 2-3% being unwilling to take on new loans with higher rates.
We expect this trend to continue in 2023. With rates continuing to hover in the 5-6% range, homeowners who have locked in new rates at around 3% over the past few years will be reluctant to put their properties on the market. The good news for other homeowners is that this will apply upward pressure to prices – low supply means higher prices.
Prices Will Increase, But Not By Much
November of 2022 saw the first time that the average sale price in Los Angeles was lower than the same month in the prior year (although not by much). This was likely largely a result of the spike in interest rates in October and November – the impact of interest rates on sale prices tends to lag by about one month due to the time to close a deal. However, as noted above, late 2022 saw a decline in interest rates and a resultant improvement in buyer sentiment.
We expect prices in 2023 to see a return to a pre-covid, or a more “normal”, market. This means a moderate 3-5% improvement in the market, as opposed to the 10%+ increases in the past two years. Although higher interest rates will put downward pressure on home affordability and overall buyer sentiment, low supply will continue to float prices.
What Other Experts Are Saying
Many experts agree with our predictions, while some disagree. Below is a sampling of predictions from some other experts:
- The National Association of Realtors predicts a return to market “normalcy”, including a moderation in interest rates and home prices.
- Realtor.com predicts interest rates to stabilize around 7% and prices to increase by a moderate 5%.
- Redfin.com predicts a decline in home prices and interest rates.
- The California Association of Realtors predicts a decline in both sales and home prices.
- Zillow anticipates a flat market.
There is of course no unanimous consensus on what 2023 has in store, and the only guarantee is that it will be an interesting year.
If you would like to further discuss our 2023 real estate predictions or how Esquire Real Estate Brokerage can help you in the Southern California real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.
