Housing forecasters anticipate a negative year in 2023, but mortgage costs will ultimately determine where the market goes. A 100% increase in mortgage rates occurred between the beginning of the year and late October of 2022, rising from 3.5% to over 7%. As a result, many Americans’ effective home ownership costs increased dramatically.
Most home buyers finance their purchase with a mortgage, so the mortgage cost determines what the buyer can afford to pay for the home. All else equal, the cost of a home a buyer can afford would roughly halve if mortgage costs doubled.
Short-term interest rates are set by the U.S. Federal Reserve (Fed), which can influence borrowing costs over the long term. In 2023, the Federal Reserve will raise rates again. In spite of the fact that the Fed’s current plans are too long-term to affect mortgage rates immediately, mortgage costs may remain high for some time to come. Jerome Powell, the Fed chair, said last November that the U.S. housing market is “very overheated.” There hasn’t been much decline in house prices since then.
It is likely that house prices will soften due to the significant increase in mortgage costs and reduced affordability recently. That’s what many predict, and what current trends indicate will happen.
The price of houses has, however, only partially recovered its recent jump since 2022, and has not yet decreased in absolute terms year over year in many regions. Continuing sluggishness in the housing market in 2023 may change that.
It is important to consider the possibility of a recession as well. If people lose their jobs, it can have an adverse effect on the housing market. As far as the jobs market is concerned, it has remained better than expected so far. House prices in 2023, however, appear to have a relatively negative backdrop.