The 2020 annual inflation rate was 1.4%. People were scared, homebound, and grateful if they still had a job. Two years later, the picture changed from one of despair to one of hope.
In early 2022, we appeared to be on the road to physical and mental recovery. The pandemic deadliness abated, and individuals began to travel and socialize once again. But that optimism didn’t last long. Inflation reared its ugly head, peaking in June 2022 at 9.1% until gradually settling down to the November value of 7.1%. Some economists are warning us to prepare for a looming recession, and the stock market hasn’t quite decided what it will do.
This article attempts to answer the following questions What is the housing market forecast for 2023 and how do inflation, the economy and housing factor in?
Get Your Free Auction.com Account
What Caused the Dramatic Jump in Inflation?
Our present inflationary issues are a nefarious side effect of the COVID-19 pandemic; only this time, the target is economic and not physical. Strict COVID-containing policies forced the shutdown of Chinese manufacturing cities, and on the other side of the world, millions of U.S. employees fell ill and were unable to work. This inability to obtain needed materials and the pandemic-related labor deficits led to supply chain shortages, which stalled new home construction. The resulting lack of inventory in the housing market and sellers’ desire to delay listing until the ever-increasing sales prices peaked increased the demand for rental properties, and monthly rents soared. Increased transportation costs, decreased Russian fertilizer imports, reduced Ukrainian wheat shipments, and the resulting increased pricing by food suppliers are causing monthly grocery bills to surge.
The pandemic allowed many employees to work from home, and they discovered they liked it. When the danger passed and employers ordered them back into the office, millions of employees around the world quit their jobs. Many others may have left because they realized the fragility of life. Life is short, so why waste eight hours a day doing something you don’t like?
Companies began to offer higher wages to retain valued employees and recouped those expenses by increasing the price of their products. As consumers started to socialize and travel more, restaurants, hotels, and airlines raised prices to compensate for their losses during the pandemic.
How do we control this inflationary spiral?
What Is the Federal Reserve Doing to Control Inflation?
The Federal Reserve’s mandate is to maintain stable prices and full employment. As the central bank of the United States, this economic institution has tremendous powers to regulate monetary policy and influence interest rates. The Fed sets the federal funds interest rate, which is the target interest rate that commercial banks use as the basis for their negotiated charges for overnight loans with other banks. The banks also factor it in when setting their prime interest rate. The prime interest rate that banks charge their best customers on credit cards, car loans and bank loans is usually about 3% higher than the federal funds rate. The federal funds rate also indirectly affects lenders’ interest rates on mortgage loans. If raising the federal funds rate increases the borrowing costs for all consumers, why is the Fed doing it?
Supply and demand are the two driving forces in an economy. The Fed can’t do much to affect the supply-side shortages that are driving up prices, so they need to focus on cooling the demand for these products and services. They do that by increasing the cost of consumer borrowing, which will theoretically lessen the demand for services and products, lower prices and stabilize the economy.
Is it working?
What Is the Current State of Our Economy?
The Fed’s targeted optimal inflation rate is 2%, and the November 2022 rate was 7.1%, an improvement over earlier months. So, we appear to be on the right track, but we still have a long way to go. The Fed’s current estimate is that the country will reach the targeted 2% inflation rate in 2025.
The Fed has expressed concerns that the labor market is too strong. Companies continue to hire new employees who demand higher wages to pay for the increasing costs of goods and services. Higher salaries benefit employees but cause an inflationary backlash. As we have discussed, the Fed’s strategy is to control inflation by making borrowing costs uncomfortably high for consumers, thereby lowering demand, which will cause prices to fall. However, if consumers’ incomes keep increasing in response to inflation, then there is no end in sight to how far the Fed will need to raise the interest rates to end the cycle.
How does this affect our 2023 housing market?
What Is the Housing Market Forecast for 2023?
The real estate market’s health depends on the Federal Reserve’s actions in controlling inflation. Many experts expect that 2023 may have two phases. During the first half of the year, the Federal Reserve will continue to raise the federal funds rate as it monitors the monthly inflation reports. These increases will likely be in smaller increments since the numbers at the end of this year show a steady decline in the inflation rate since the June peak.
The second half of 2023 may be a wait-and-see assessment period to determine if the Fed’s efforts have caused inflation to assume a sustained downward momentum, which might continue without any additional increases in the interest rate.
If the Fed increases borrowing costs too high, people may stop spending money on non-critical goods and services, and companies may stop hiring new employees. If this escalates, the country may fall into a recession. This article concludes with a discussion of the recession’s impact on the housing market.
Will Interest Rates Keep Going Up?
Recently, the Federal Reserve announced an increase in the federal funds rate of .50%, reaching its highest level in 15 years. It expects to raise the rate an additional .75% in 2023 and will not lower it until they are confident that inflation is under control. Lenders usually increase mortgage interest rates when their borrowing costs rise, so it’s reasonable to expect mortgage rates to continue an upward movement during the next six months.
It appears that we are entering a period of monetary policy tweaking — raise the rate a little at a time and assess — rather than a time of full-throttle policy attacks. The recent trend in declining inflation rates indicates that the Fed is pursuing the proper course of action.
Can We Expect a Large Number of Foreclosures?
In November 2022, ATTOM data shows that completed foreclosures were 64% higher than the previous year so there could be momentum for foreclosure filings in 2023 as more than 67,000 properties started the foreclosure process in Q3 2022, up 167 percent from a year ago, according to ATTOM Data Solutions. The third quarter marked the third consecutive quarter where foreclosure starts were up by triple-digit percentages from a year ago.
An Auction.com historical regression analysis indicates that the foreclosure starts in the first three quarters of 2022 typically should produce about 137,000 completed foreclosure auctions in the first three quarters of 2023. That would be more than double the volume in the first three quarters of 2022
However, because there was a moratorium on filings during the pandemic, this number is artificially inflated, and the 2022 numbers are actually only 80% of the pre-pandemic numbers. So, what does this mean for 2023?
The 2022 surge in residential sales prices increased the value of homes throughout the country. Rick Sharga, Executive Vice President of ATTOM, recently expressed his belief that more than 90% of homeowners in the initial stages of foreclosure have significant home equity and would benefit from selling their homes rather than allowing them to foreclose. However, many homeowners are still disinclined to sell as the equity may not be enough to get them where they need to be which causes a stalemate and ultimately foreclosure.
This unique market makes for another reason for investors to keep an eye on websites like Auction.com for foreclosures and bank-owned properties as the economies many moving parts provide a lot of scenarios for foreclosure properties to hit the market.
Where Should I Go To Find Foreclosure Properties?
Whether you’re a beginner or a veteran in the foreclosure home buying space, you’ve probably heard of Auction.com as it’s regularly rated the top real estate auction site. The site is easy to navigate, searching for home auctions is intuitive, and auction listings contain information about the home as well as minimum bids or reserves when available.
Are Bidding Wars Over?
While buyers may still compete for homes in some regional markets, many other areas have experienced a cooling market with few competing bids. Having buyers compete for a property will result in a faster sale that may increase the purchase price beyond the MLS list price. If you’re a seller who’s interested in partaking in a competitive arena, consider house auctions. You can set the minimum acceptable bid and let the participants take it from there. If you’re interested in flipping homes, check out the various types of auctions, including both foreclosure and non-foreclosure sales in your area.
What Are the Projected Housing Market Trends?
Forecasters have mixed opinions about whether or not market prices will drop next year. The National Association of Realtors estimates that 2023 sales will drop 6.8%, and prices will remain roughly equivalent to the 2022 figures. On the other hand, ATTOM’s Rick Sharga stated that home values on a national level are almost certain to decline at least modestly, perhaps between 5 percent and 10 percent.
Will Inventory Increase in 2023?
Experts have differing opinions on projected inventory levels in 2023. Some believe that sellers on the fence in 2022 will grow tired of waiting and list their homes before housing prices fall any further. Others think sellers won’t move unless they have to if the interest rate on a new mortgage will be significantly higher than their current one.
Will Rental Prices Fall?
Real estate markets are local, but national data indicates that rental prices are decreasing for new leases and that 2022 is on track to have the lowest apartment rental demand since 2009. Vacancy rates are increasing, and many expect this trend to continue as Americans wait to see what will happen. The areas with the sharpest increase in the past will potentially experience the steepest decline.
Declining rental rates most likely will not apply to renewals unless the landlord is willing to negotiate. Tenants may have to relocate at the end of their lease to take advantage of the lower rates. Predictions are that by midyear 2023, rental supply and renting demand will stabilize, effectively eliminating one contributing factor to inflation.
What Happens if There Is a Recession?
If the Fed overplays its hand and the country plummets into a recession, a different scenario comes into play. Unemployment will increase, and housing prices, sales and interest rates will decrease. These events will cause heartache for many, and homeowners facing the prospect of a reduced income will start to list their homes before prices fall even more.
The increased inventory and lower prices will provide an excellent opportunity for financially stable buyers interested in real estate investing. If prices drop to pre-pandemic levels, existing homeowners will lose equity, possibly resulting in increased short sales by distressed homeowners who purchased homes during the 2021-to-2022 run-up in home sale prices.
If a recession does happen, it is most likely to occur in the second half of 2023 and continue into 2024. During this time, expect to see an increase in the number of short sales and in foreclosures. The number of foreclosures will depend on how aggressive lenders, and possibly the federal government, choose to be with their mediation efforts.
Conclusion
We are heading into uncertain times. Investors should stay current on developments that affect the real estate market. The Federal Reserve Board will issue its 2023 economic projections in March, June, September and December. Pay attention to the announcements and plan accordingly.
Links To Helpful tools:
- Remote Bid: The future of Foreclosure auctions. Browse, bid and win select Foreclosure properties from anywhere with ease. Qualify for remote bid or meet with a specialist today.
- Frequently Asked Questions: Find answers to frequently asked questions from Auction.com users.
- Foreclosure Home Properties Help Center: Navigate through a Foreclosure auction with confidence using our quick access guide. Learn terminology and catch up on State requirements. We have tailored sections for Foreclosure and REO properties.
- Real Estate Auction Calendar: Find real estate auction events in your area. Filter by State, asset type, and date to get a list of properties near you. Or just search com to start with a list of properties with our useful filters
- Foreclosure vs. Bank Owned: Watch our educational video on Foreclosure vs. bank owned properties and find out which one is right for you.
