The Truth Behind the 2022 Housing Market & 2023 Forecast
State of The Market Address
There’s no doubt about it, 2022 will undoubtedly go down as a year to remember for the Real Estate market. We saw a significant shift from the boom we’ve experienced over the last few years - just probably not in the way you think.
Today, we’ll be discussing what happened in 2022, why it happened, why you shouldn’t believe all the headlines, and look at some pricing stats and some predictions for 2023. We’ll talk about the good, the bad and the ugly.
What did happen and WHY?
2022 started off with a bang and was a continuation of the unprecedented times we experienced in 2020 and 2021. We saw rapidly increasing sales prices, historically strong demand, and extremely low mortgage interest rates.
Then it all started to change. In an effort to tame inflation, the Fed started raising the federal funds rate back in March. First, it went up 25 basis points, then 50, then 75, then 75 again, 75 again, 75 a fourth time and then finally 50 more basis points in December. (Source)
During the pandemic, emergency actions by the Fed helped suppress 30-year fixed mortgage rates below 3.0 back in 2020 & 2021. In 2022, the script got flipped. Back at the beginning of 2022, rates were around 3.22. By April, we were in the low 5’s. (Image) We saw a bit of a reprieve towards the end of the summer but they quickly started going back up again peaking into the mid-7s in October.
This all created a massive pullback from buyers and a drop in the total demand, activity, and foot traffic in the marketplace - both locally and nationally.
Renters weren’t off the hook either. According to Zillow’s Observed Rent Index, rents rose 8.4% year over year when looking at the most recent November numbers. (Source) RealPage data indicated that rent prices peaked back in March when they had increased 15.7% year over year. (Source) In good news on that front, rents have declined from October to November this year marking the end of a two-year period that saw rents increase each month.
How was the residential real estate market affected? Simply put, the total number of sales in the market plummeted when compared with 2021. According to the National Association of Realtors, the total number of sales has dropped 35.4% between November of 2022 and November of 2021.
In Rhode Island, we saw the total number of single family sales decrease by a little over 17%. However, this year was really kind of a Jeckyl & Hyde situation. The impact of rapidly rising rates really hit hardest towards the latter part of the year. When looking at single-family closings in the 4th quarter compared to the same time period in 2021, we saw the total number of sales drop over 33%. Early numbers show the total number of sales in December being down close to 44% year over year.
All doom and gloom though, right? Not exactly. People are scarred from the Great Recession back in 2008. I get it, I lived through that as I started my career back in 2006. I recently ran across a great article from Mike Delprete where he shared two key charts to contextualize the U.S. Housing Market. He said, “Context Matters: The reality is that the market is down, but simple comparisons to a sky-high 2021 are amplifying the scale of decline.” 2021 was THE HOTTEST REAL ESTATE market of all time.
Historical data beyond what happened year over year can be hard to find. The first chart he shared compared the sales activity of existing home sales going back to 2012. (Source) The drop we experienced in the second half of 2022 is not nearly as significant when looking back at other years before 2021. It’s much more in line with what we experienced back around 2012.
In Rhode Island, early numbers are looking like we’ll have somewhere around 9500-9600 single-family sales in 2022. Here is a chart looking at the total sales in our state over the last 20 years. Yes, the sales in 2022 are less than we’ve seen in recent years but very similar to what we experienced in 2015 and MORE sales than we saw in EVERY year from 2007 to 2014.
The second chart Mike Delprete looked at was consumer demand for mortgage loans… specifically purchase loans. This is published weekly by the Mortgage Bankers Association and showed that we saw record lows in demand at the beginning of December but just barely below 2014 levels. In addition, since inflation reports have become more favorable, mortgage rates have begun trending back down from their peaks and there is a recent uptick in demand.
So what about prices? People think housing crash and think of values dropping like they did back in 2008. They’re not though. Values have not crashed. In Rhode Island, they haven’t even gone done. At all. They are still appreciating, just at a slower pace… which is a GOOD thing.
According to the Zillow Home Values Index, At the end of November, the typical home value in the US was valued at about $358K compared with about $334,000 in January of 2022… an increase of about $24,000. In 2021 during the same time period, the typical home value rose by about $46,000. (Source)
In Rhode Island, Here is a chart looking at the median price in Rhode over last 20 years. it’s looking likely that the median sales price will be over $400,000 in 2022 for the first time in history and based on early numbers, looks like it should be about $402,000. .There is still a chance for some late reporting and for that number to adjust slightly but that’s up just over 10% year over year. Even in December, prices still rose close to 4% when compared to December of 2021.
The main reason for this continues to be a lack of supply. Here is a quick look at the historic count of active listings in Rhode Island dating back 5 years. There simply are not enough homes for sale. Unlike what we saw back in 2008 when we had an oversupply of homes available, now we’re seeing the exact opposite with inventory levels continuing to drop here in Rhode Island.
Predictions for 2023
Let’s look at some of the leading players in the industry and their predictions for 2023.
Danielle Hale, Chief Economist at Realtor.com, is calling for an average mortgage rate of 7.4% falling to 7.1% by year-end. They feel values will continue to appreciate based on a lack of supply predicting an increase of 5.4% with the total number of sales continuing to fall by an additional 14.1%. Finally, they’re calling for inventory levels to increase close to 23%. (Source)
The Zillow Research department was much more vague in their housing predictions for 2023. They said, “Zillow expected national home values to remain relatively flat next year, and even fall in the most affordability challenged markets. Mortgage rates, highly impactful to the mortgage payment, are seeing some recent and encouraging profess downwards as inflation and labor market tightness show small signs of easing… If we’ve actually turned the corner on inflation, that should continue” (Source)
Lawrence Yun, chief economist at the National Association of Realtors, (Image) is predicting that home prices will be flat in 2023, the total number of sales to decline further by about 7%. He said, “half the country may experience small price gains, while the other half may see slight price declines”. He feels we’ll see a bigger rebound in 2024 with sales increasing 10% and values increasing 5%.
Yun feels that mortgage rates likely have already peaked pointing to an “abnormally high spread” between 30-year fixed rates mortgages and the 10-year US treasury. He said, “as the mortgage market normalizes, it will be an opportunity for rates to decline even further.” (Source)
Finally, here is a chart from Keeping Current Matters with the latest forecasts from numerous entities. The average of all listed were 0.4% appreciation and Ivy Zelman, the most bearish of them, was calling for a 5.1% decrease.
Perspective on Pricing & Sales Volume
Maybe you’re considering buying or selling a home this year. Or maybe you bought in the last couple of years and are wondering if you made a good decision.
Even if you’re the biggest pessimist out there, let’s put some perspective into prices “crashing”. Let’s consider some of the worst-case scenarios on a national level.
Let’s start with National numbers… If values dropped 5%, we’d be looking at values similar to February of 2022. If values dropped 10%, we’d be looking at values similar to October of 2021. If they dropped 15%, we’d be looking at similar numbers to June of 2021. If they dropped 20%, we’d be around February of 2021 values. If they dropped 25%, we’d be back to October of 2020.
Recently, I also ran across some negative headlines about the housing market from Diana Olink from CNBC. There are hundreds if not thousands of others but let’s just take a look at some of the headlines she’s put out in recent years.
In 2015, she wrote an article with a headline of “Housing Today: a Bubble Larger than 2006.”
In 2016, she said, “We’re in a new housing bubble…”
In 2017, she wrote “Homeownership doesn’t build wealth, study finds”
In 2018, “It’s better to rent than to buy in today’s housing market”
In 2019, “The housing market is about to shift in a bad way…”
Also in 2019, “Next year will be hard on the housing market…”
In 2021, “Housing boom is over…”
During that timeframe in Rhode Island, we saw values increase 4.7%, 6.6%, 6.3%, 5.9%, 5.6%, 12.3% and 14.3%. The median price over that timeframe increased from $215k to about $402k which would mean that if you sat on the sidelines due to headlines like this, you lost out on about $187,000 in value gains, never mind the equity you would have picked up by paying down your mortgage.
The media and so many who feel jaded by the market are calling for a crash similar to 2008. With that being said, the current market conditions are nothing like 2008.
The job market remains strong which bodes well for the housing market. During the Great Recession, there were 8 million job losses in a single year.
There are less risky loans. Subprime loans were extremely common in 2008 and are basically nonexistent now.
Inventory Shortages are still rampant. (Image) There remains a housing shortage in Rhode Island with active single-family listings back under 1,000… a fraction of what we had for active listings on the market back in 2008.
Delinquency rates are low. In the Great Recession, about 10% of all borrowers were delinquent. It’s currently around 3.6%, which remains near historical lows. Further, we’re seeing extremely low foreclosure rates. In the crash, we were seeing foreclosure rates of around 4.6%. People were upside down and walking away from their homes. Homeowners today are sitting on tons of equity now and the foreclosure rates are currently around 0.6%
I believe we’re in store for a more balanced market between homebuyers and sellers and would think that inventory levels would start increasing as we approach the spring. With that being said, they’ll still likely be below where we need to be. We’ve seen the rate of appreciation slowing of late but still going up. I would expect much of the same in 2023 and prices to be pretty flat or continue going up at slower rates until inventory becomes balanced or shifts to a buyer’s market.
We’ve certainly been on a downward trend from a total sales perspective and expect that to continue for the foreseeable future. 2022 has been a difficult year for many. The vast majority of real estate agents have never experienced a shift like this before. Which real estate agent you work with matters more now than it has in some time. Ensure that you have a team behind you that understands the market, has the experience, and is committed to helping you accomplish your real estate goals.
It’s important not to leave you on a negative tone. People buy and sell real estate each and every year due to the 5 Ds. Death, Divorce, Diapers, Diamonds & Degrees. Those happen regardless of market conditions. For sellers, values are still outstanding and there are qualified buyers in the marketplace actively searching for quality homes. For buyers, while rates are up… you’ll face much less competition than you did over the last 3 years, won’t have to make sacrifices such as waiving inspections or covering appraisal gaps, and always have the option to refinance down the road if rates come down. With that being said, it’s critical that you’re comfortable with your payment now and know that would be a bonus… but don’t bank on it.
I’ll leave you with a couple of my favorite quotes...
"It’s not about timing the market, but about time in the market."
"Don’t wait to buy real estate. Buy Real Estate & wait."