Buyers, Market Update, Real Estate Advice, Sellers, Trends

February Market Update

January 30, 2023

Over the past year, we have seen many changes in the housing market, from rising mortgage rates, to decreasing home prices, to shifting buyer demographics. Amidst all of these changes, it seems there has been no shortage of misinformation, confusion, or conflicting opinions about what this year will look like for the market. So what do we know? Well, if we look at what’s happening in the market right now and compare it to what we’ve seen historically, we can actually get a pretty good idea of some trends we can expect to see (and trends we can expect not to see) as we continue forward into the year. Let’s take a look!

What’s Ahead for Mortgage Rates

The 30 year fixed rate more than doubled last year, the first time that’s ever been recorded in a calendar year [1]. We have all felt the impact of this as market activity started to decline, uncertainty for the future rose, and expert forecasts for 2023 have been all over the board. So what does that mean for mortgage rates in 2023?

If we take a look at mortgage rates over time and compare it to other indicators in the financial market, we can see one key trend that might shed some light on what’s happening. Historically, the 30 year fixed mortgage rate and 10 year treasury yield have essentially mirrored each other. As the treasury yield rises and falls, mortgage rates tend to follow along. On average, the mortgage rate is about 1.79% higher than the treasury yield. Right now, the difference is about 2.79%, which is significantly higher than what we would expect to see. With a normal spread, we would have a mortgage rate of about 5.48% instead of the 6.6% we see today. [2, 3]

So what does that mean for the future of mortgage rates? If we know that mortgage rates follow the trends of treasury yield, and the financial market likes to reach equilibrium, then we can look at the year treasury yield to see where mortgages are heading. Because the spread between the two is higher than what we expect, we know the 30 year fixed rate will need to decrease to balance back out. One expert said, “the upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November” [4]. Although we will likely continue to see fluctuation, we know mortgage rates are finally starting to cool and will continue to do so throughout the year.

Home Prices Are Not in a Free Fall

Another question many of us have about 2023, is what it will bring in regards to home prices. In recent months, we’ve heard a lot of talk about a decline in home prices, and many sellers are concerned they will continue to fall throughout this year. So to understand the future of home prices, it’s important to recognize what has brought them to where they are today.

Over the past few years, we have definitely seen a rise in appreciation. Before the pandemic, home price appreciation was at 12%, and after the pandemic, appreciation had jumped to 38% [5]. As we entered 2022 however, inflation and the subsequent rise in mortgage rates, caused this upward trend to plateau. As the summer came to an end, home prices started to see a month-to-month decline, which continued through the end of the year. [6]

So what does that mean for home prices in 2023? Well, it’s important to note that although we have seen a decline in recent months, that does not mean home prices are in a free fall! The recent month-to-month decrease reached a peak in August with a percent change of only -1.1%, which has eased since then. The most recent report only showed a -0.5% change. [6]

Another notable factor that provides a better perspective on what to expect, is the year-over-year home price trends. Even though we’ve seen short term price reduction, the majority of homes still have positive equity gains. Even as home prices were dropping in Q3 of 2022, overall the majority of homeowners were still seeing a year-to-year appreciation in home value [7]. The percentage of homes that saw these declines in prices was also low, barely reaching over 1% of homes at its height [8]. This means that although some specific homes and markets may feel a greater impact from these changes, the majority of homes will be relatively unaffected as the year continues.

As for expert home price predictions, numbers have been all over the board [9-15]. In their most recent predictions, some of the leading experts in real estate predicted anywhere from a 5.4% appreciation [9] to a -5.1% depreciation [10]. Despite the wide range in predictions, one thing these expert predictions share in common is that none of them include a sudden plummet in home prices like what we saw in 2008. Even though prices may feel some downward pressure through 2023, we are still in a period of long-term home price appreciation.

The Takeaway

Although the current housing market is still facing high mortgage rates, cooling demand, and downward pressure on home prices, there is still consistent market activity and a hopeful outlook for the coming year. As the year continues, we can expect to see a continued ease of mortgage rates, followed by a return of buyers. Experts may be undecided on the short term direction of home prices, but we do know they are not predicted to plummet, and are still expected to continue to appreciate in the long run.