Since last year, we’ve seen a real estate reset. Now that analysts are getting used to this new market phase, how have expectations shifted? What’s ahead for this real estate roller coaster? A buyer’s market? A return to balance? Frustration or opportunity?
Thinking five years out could be a helpful exercise for those planning to buy or sell when the time is right.
First, There Is No Bubble
The market has plateaued. We know that existing homes are running just 3-4% pricier than they were a year ago — oddly normal! And we know that the rise has been much more striking for new construction — up 14%, builders say. This is mainly because new construction is relatively scarce.
With supply still very tight, most homes can be quickly sold. Most sell in less than a month. In what we used to call normal years, it took nearly twice this long to sell a home. In other words, sellers continue to be in a position of strength.
Sellers should be able to keep this advantage through 2023, especially in suburban areas around popular job markets. Hybrid work norms are here to stay in a number of job sectors. Suburban homes near convenient public transport are especially well positioned for times like this.
That said, the frenzied seller’s market, which put a lot of buyers under pressure to waive contingencies, has begun to taper off. Taper is the keyword. There is no bubble. As we can now clearly see, this real estate market is much more likely to dip than pop. A market crash is defined by price drops of 30% or more. No real estate company at this time expects that to happen.
When people lose their homes in droves, or builders are oversupplying homes, or there are too many houses being listed all at once, the market can see crashes. Today’s setup looks nothing like that.
In any case, buyers will want to focus less on the macro environment that goes into all these predictions, and more on where they are buying. Housing markets vary by location: region, state, city, and particular communities.
OK, Looking Ahead Through 2028…
It’s looking like a “normal” market could become a reality within five years or so. And prices look like they’ll appreciate at a rate the industry is used to: somewhere around 5% per year.
Some markets, though, could droop. Analysts believe some of the most popular cities in California could drop in price by 10% overall. In fact, new figures from Redfin show San Francisco home values have already come down 10%, year over year. The markets that soared in 2020-21 (think Boise, Austin, Phoenix) are now the most vulnerable to price dips as the market tries to level out.
For those who buy when the market is rising, a home appreciates in value effortlessly. After holding the home five years or more, these owners build up enough equity to consider selling at some point, covering all the closing costs and still profiting from the sale.
But over these next five years? It won’t be so easy.
And yet, there is some good news. By 2028, the industry is looking forward to a balanced market. When neither seller nor buyer automatically has the upper hand, negotiations tend to be fairer.
Granted, it would be better if this were happening in a less pricey housing environment. But at least the people who are saving up for a home now can expect a calmer atmosphere over the next few years.
☛ Future buyers will be in the best position if they can handle a 20% down payment and avoid having to pay private mortgage insurance.
Speaking of mortgages, Freddie Mac’s charts now show the average 30-year fixed mortgage carrying an interest rate close to 7%. Industry watchers say the rate should dip back below 6% by the summer of 2024. The Mortgage Bankers Association has said this dip could come earlier — by late 2023.
With current rates at a high level, adjustable-rate mortgages (ARMs) are attracting some buyers. But when the rate dip arrives, most buyers will want to lock in fixed rates on 30-year mortgages. Buyers who get fixed rates in 2023, and then witness the (potential) rate drop may want to refinance. Rocket Mortgage is already anticipating this need, and offering customer support for it.
Look Out for Stress Tests Ahead
The U.S. central bank has told six big banks to run stress tests on their portfolios for climate-related real estate losses in 2023. Reuters reports:
The pilot assessment has banks map out what would happen to their residential and commercial real estate loan portfolios in the event of a severe hurricane in the Northeast, as well as a second climate shock of their choosing — like fires or drought — in another part of the country.
Responses are due by July 31 from:
- Bank of America
- Citigroup
- Goldman Sachs
- JPMorgan Chase
- Morgan Stanley
- Wells Fargo
We already know that sea level along U.S. coastlines could rise as much as a foot during the average home buyer’s lifetime. This red flag comes from the NASA Sea Level Change Team, which is helping people and businesses anticipate recurring flooding in the coming years.
Guarding Equity Over Time: It’s Doable
Guarding home equity is mostly about staying in the homes we buy, long-term. Our equity is, of course, the worth of the home, less the total debt we have left to pay on the property.
Home equity is, for most homeowners, a primary store of value. And just to get started, many people spend years saving up for a mortgage. As homeowners faithfully pay these loans off, we want home equity in return for all we’ve invested. We want to know we’re making well-informed decisions. So, whether we are hoping to buy or sell, we might wish for an accurate crystal ball.
In 2023, we do know that many homeowners can feel good about their equity. Overall, property values are strong. Looking ahead, if the market falters, it probably won’t be by much.
But what about people who have well-founded concerns about losses ahead? In the coming years, as always, the keys to guarding home equity are: (1) Keep the home; and (2) faithfully pay off the mortgage. Each payment builds equity and reduces debt, and the longer we do it, the higher our real estate values tend to rise — as this graph makes clear.
Yes, we live in inflationary times. Yes, a recession could be in our future. But as long as home buyers keep holding on through the difficult times, property values do tend to reward us in the long run.
Supporting References
Dina Cheney for Bankrate, LLC (part of Red Ventures), via Bankrate.com Housing Market Predictions – The Forecast for the Next 5 Years (Jan. 5, 2023; citing data from NAR and the National Association of Homebuilders).
Dana Anderson for Redfin.com: Housing Market Update – Pending Sales Drop to Lowest Level Since at Least 2015 (Jan. 5, 2023).
Deeds.com: The Housing Market “Reset” Is Coming. Here Are 5 Tips to Protect Your Equity (Nov. 9, 2022).
Deeds.com: Buying a House to Save Money? It’s a Tried and True Method (Jun. 22, 2020).
And as linked.
Photo credits: Mikhail Nilov and cottonbro studio, via Pexels.