We’re still in the first quarter of the new year, but I wanted to share some housing data that I think can be useful in housing market predictions in 2023. Mainly, I want to look at the numbers on home appreciation. We’ll look at the trends, home values, rising home prices and the so-called housing market crash that so many in the media are trying to declare.
Previous Home Appreciation
First, let’s wave a collective goodbye to 2022. Though I was able to help many clients close on a home, in general, competition and rising housing costs created challenges for many would-be homebuyers. In fact, in the third quarter of 2022, the sales price of existing single-family homes rose 8.6% to $398,500 from the year before. That’s in nearly every metro area measured and reported on by the National Association of Realtors®.
Home values also rose along with the sales price, with 46% of metro markets posting double-digit annual appreciation. However, this was down from the previous quarter, which saw an 80% increase. This slowdown is connected to the initial market corrections that began in the second half of 2022. Simply put, we got way ahead of ourselves in terms of prices, affordability and other factors that stood in the way of many buyers. One of those factors is the housing supply and interest rates.
Housing Construction
Since the beginning of the pandemic until recently, the pace of new home construction hasn’t been able to meet the market’s demands. The cost of materials and labor shortages threw sand in the gears and put upward pressure on the price of every home built. If builders aren’t confident they can sell at those higher costs, they can’t move forward. We’re still not totally over these issues, but builders seem poised to start up again as affordability increases.
The National Association of Home Builders/Wells Fargo Housing Market Index, a real-time read on builder confidence, recently hit its highest level in a decade. NAHB Chairman Alicia Huey said, “With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market.”
Interest Rates
Interest rates may seem disconnected from home values, but they are directly connected to demand. Low mortgage interest rates attract more buyers to the market and create competition, which can then stimulate home values. These connections can seem complex, but in the last few years, with record-low rates from 2019 to 2021, home values skyrocketed across the country. Last year we saw interest rates shoot up and halt the home purchase frenzy.
This year looks to be a return to normalcy. The average interest rate from 1971-2023 was 7.75%. Compare that number to the one recently released from a Freddie Mac survey of mortgage lenders, and we can see that the average rate on a 30-year fixed mortgage decreased to 6.09% as of February 2. That’s down from 6.13% in the previous week.
We can’t say what tomorrow’s rates will look like, but these rates seem to correspond to rising home values, though not at the intense rate that they were only a few years ago.
Historical Home Appreciation
Does this mean that buying a home is a bad investment? Not at all! Though home value change from year to year, long terms home values trend upward. Let’s look at the graph below.
Released by the Federal Reserve Board and called the FRED, this information comes from the Saint Louis Federal Reserve and tracks 60 years’ worth of home appreciation data that you should feel free to investigate on your own.
The timeline starts on January 1, 1963, and goes up to the third quarter of 2022 – just a few months behind us in real-time. The striking thing about this graph is that you can clearly see how home values have continued to rise since records have been kept. There are two interesting points that this graph illustrates. That’s the effects of the 2008 crash and the rise in home prices in 2019.
Leading up to the crash, there was, simply put, a lot of greed in the housing market. There was no shortage of homes available but also no shortage of homes sold through deceptive practices. The next sharp rise in home values happened in 2019 for entirely different reasons.
The other side of the chart shows 2020 and 2021. Those two were kind of an anomaly created by the pandemic. With the availability of remote work and the desire of many homeowners to move, perhaps out of the city, existing homes became a premium. In addition, interest rates were subsidized by the federal government. Numbers hit below 3% in many scenarios, pushing prices up to unrealistic levels on a sustainable trend.
That rise in rates in 2022 tapered off that rush, but the housing market crash many are scared of looks to be nowhere in sight. Unlike the years leading up to 2008, there is a real lack of housing and a real demand from buyers. So, will housing prices fall? The answer is yes and no.
There will always be dips, but as the FRED chart shows, home prices tend to continue rising. For today’s homeowners and soon-to-be homeowners, some exciting housing forecasts from economists predict that for 2023 we will see a 2 to 4% appreciation rate. Those numbers mean affordability for buyers and wealth creation for owners.
Is Now A Good Time To Buy?
Today’s market has slowed down, which is good for buyers. You’ll no longer be facing 10, 20 or 52 offers like I had last year with one of my clients on a home that sold for 50% over the asking price. In this market, you could go after a home you love without making a decision in twelve minutes. You probably won’t be fighting 30 or 40 other offers, either.
The benefits of this diminished competition mean you may be able to write a softer offer or get closing cost credits from the seller. You can buy a home you love at a reasonable price point, especially when compared to where things were only six to twelve months ago.
My advice is that you look for a home that matches your requirements while also keeping in mind that a house is a long-term purchase. That means owning it for a three to five-year minimum to have it make economic sense. Whether you’re a first-time buyer, an investor, or someone moving up or rightsizing to a home that fits your new needs, all indications seem to say that now could be a great time to purchase.