If you have been reading this blog regularly, then you are well aware of the changing tides in the housing market. As we finish up the 2022 year, it is apparent that the housing market has almost come to a standstill. Of course, with out-of-control inflation resulting in the Federal Reserve implementing some aggressive measures through interest rate hikes, this is to be expected. Looking back over the past 10 months or so, we have seen mortgage rates go from 3% to 7%. This has quickly resulted in many buyers being priced out of the housing market altogether. However, even though the buyer demand has decreased significantly, we have not seen the inventory of homes for sale rise dramatically. While homes are taking longer to sell given the lower number of buyers in the market, we are not seeing a glut of homes for sale in the market. As a result, home prices are holding firm at high levels throughout most of the country. So what could make home prices drop in 2023?
All eyes on home inventory
As mentioned above, home buyer demand has plummeted as interest rates have hit a two-decade high. Interestingly, home prices have stayed high for the most part largely due to the persistently low inventory of homes for sale. As of late 2022, there is approximately a 3.3 month inventory of homes for sale across the country. For perspective, a healthy and balanced market typically has about 5 to 6 months of housing inventory. As we head into the first quarter of the new year, the inventory of homes for sale will be the single greatest factor in determining home prices. Typically, the inventory-to-sales ratio spikes in January and February as transactions crater and the first new listings start to come online. We tend to see this increase in the inventory of homes being listed for sale as more homeowners prepare to list their homes for sale in anticipation of the the spring home buying season. Moving forward, the housing market will be in a delicate balance between higher rates causing buyer demand to remain low and the inventory of homes for sale on the market. If the inventory of homes for sale increases above the 6 to 7 month level, we could very well see home prices pulling back considerably.
As a real estate investor, it is important to closely follow the market trends along with the overall economy. As we have seen throughout 2022, out-of-control inflation has resulted in the Federal Reserve having to take aggressive measures to combat these runaway prices. The main tool for the Federal Reserve has been to rapidly increase interest rates, essentially shutting down much of the housing market. For most economists, the expectation is for interest rates to remain at current levels. Recent economic indicators seem to point to inflation being in check for now. Should we see an uptick in inflation again though, we could expect even higher interest rates. Ultimately, the future of home prices in 2023 will be most influenced by the inventory of homes for sale. Although most real estate experts believe that buyer demand will remain soft for 2023, this will be directly related to what level interest rates go to.
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