As we welcome the arrival of cooler temperatures, the housing market continues to generate heat of its own, leaving potential homebuyers wondering when they can expect more affordable prices. The current scenario is marked by soaring mortgage rates and scorching home prices, which have become increasingly challenging for aspiring homeowners to contend with.

In mid-August, the national average 30-year fixed mortgage rate soared to a staggering 7.23%, reaching its peak for the year 2023. As of September 14, it stands at 7.18%, according to data from Freddie Mac. Simultaneously, year-over-year monthly home sales showed a 2.2% decline in July for the second consecutive month. This decline was observed across all four major U.S. regions, as reported by the National Association of Realtors (NAR).

Despite the daunting mortgage rates and home prices, the market remains fiercely competitive, driven by demand that continues to outstrip the limited housing inventory, coupled with homeowners who are reluctant to leave their homes due to previously locked-in low-interest rates. These factors contribute to the persistent affordability crisis that sidelines many prospective homeowners.

Housing Market Outlook for September 2023

The housing market's overall performance remains subdued, primarily due to the trifecta of challenges posed by high mortgage rates, elevated home prices, and restricted housing inventory. Additionally, concerns about high inflation and the possibility of further interest rate hikes loom in the background.

Mortgage rates began their ascent in mid-July and have remained on an upward trajectory. The 30-year fixed rate peaked at 7.23% in late August, marking the highest level since March 2022. This surge in rates followed the Federal Reserve's decision to raise the federal funds rate by 25 basis points during their July meeting. Notably, this was the 11th rate increase since the Fed initiated its battle against inflation in March 2022. The federal funds rate, which had been near zero in March 2022, now ranges between 5.25% and 5.5%. The Fed has indicated its readiness to continue raising rates to combat inflation.

The impact of a Fed rate hike indirectly affects long-term home loans, such as 30-year fixed-rate mortgages. As we look ahead, Fed projections suggest the terminal federal funds rate could reach 5.6% by the end of 2023, implying at least one more rate increase this year. Consequently, many experts anticipate that mortgage rates will remain well above 6% for the remainder of the year. All eyes are now on the Fed's September 19-20 meeting, where policymakers will review the latest economic data to determine their monetary policy stance—whether to keep rates steady or raise them.

The Fed's Influence on Mortgage Rates

Keith Gumbinger, Vice President at mortgage website HSH.com, emphasizes that the crucial factor is not just what the Fed does but also what they intend to do. While another quarter-point rate hike at this stage may not dramatically alter the situation, Gumbinger suggests that policymakers' statements about the duration of elevated rates and the potential for rate cuts hold more significance.

Timing the Housing Market Recovery

Gumbinger outlines several conditions that need to be met for a housing market recovery. One key requirement is a significant increase in housing inventories for sale. This additional inventory would help alleviate the upward pressure on home prices, potentially stabilizing or even reducing them from their peak levels. Concurrently, interest rates need to stabilize, although Gumbinger advises against rapid rate reductions, which could trigger a surge in demand, erasing any inventory gains and causing home prices to rebound. Ideally, mortgage rates should gradually return to a more "normal" range in the upper 4% to lower 5% territory, allowing the housing market to resemble the conditions seen between 2014 and 2019. However, Gumbinger cautions that it may take some time before we see rates return to these levels.

Current State of Mortgage Originations

With the average 30-year fixed mortgage rate now comfortably above 7%, the idea of a 5% mortgage rate seems distant. Despite these elevated rates, mortgage originations saw an uptick in the second quarter of 2023, reaching $393 billion after a low of $344 billion in the first quarter—marking the lowest total since the second quarter of 2014. Housing experts predict that originations will likely remain muted throughout the remainder of the year. Year-over-year existing-home sales in July 2022 were down significantly, with a staggering 16.6% decrease compared to July 2022. Pending home sales, often considered a leading indicator for existing-home sales, showed only a marginal increase of 0.9%.

Housing Inventory in September 2023

Housing supply remains critically low, particularly in the entry-level segment, which continues to fuel demand and sustain higher home prices. Nevertheless, new single-family homes have entered the market to some extent, attracting eager buyers frustrated by limited resale inventory. Additionally, the price gap between median existing-home sales prices and new home sales prices has narrowed significantly in recent months, making new homes more attractive to potential buyers.

On the existing home front, inventory has remained at historically low levels for months. After a stagnant June, unsold existing-home inventory increased by 3.7% between June and July, raising the supply from a meager 3.1-month to a 3.3-month supply at the current sales pace. Experts generally consider a balanced housing market to have four to six months of inventory. In contrast, new houses available for sale at the end of July totaled 437,000, representing a 7.3-month supply at the current sales rate—a decline from the 10.9-month supply seen a year ago.

Jack Macdowell, Chief Investment Officer and Co-Founder at Palisades Group, notes that inventory remains approximately 46% below historical averages dating back to 1999. He believes that resolving the inventory problem in 2023 is highly unlikely.

New Homes on the Rise

Despite mortgage rates remaining above 6.75% in July, new home sales saw a 4.4% increase to a seasonally adjusted annual rate of 714,000 in comparison to June's rate of 684,000. Notably, new home purchase mortgage applications also surged by 35.5% year-over-year in July, according to the Mortgage Bankers Association. A significant share of these new home sales was backed by FHA-insured loans, rising from 12.1% to 14% in the second quarter of 2023. These loans appeal to low- to moderate-income borrowers and first-time homebuyers due to their lower credit score and down payment requirements.

Robert Frick, Corporate Economist at Navy Federal Credit Union, suggests that new homes are now competitive on price, and this trend has been facilitated by the narrowing price gap between new and existing homes. While the median sales price for a new home in the U.S. dipped to a low of $417,200 in April 2023, it rebounded significantly, reaching $436,700 in July. Year-over-year new home sales surged by 31.5%, even as existing-home sales showed a decline.

Housing Starts Forecast for 2023

In the realm of construction, there have been mixed signals, indicating some caution among home builders due to rising mortgage rates and other industry challenges. Single-family construction starts increased by 6.7% following a dip in June. Building permit applications also rose by 0.6% from the previous month, according to the Census Bureau and HUD.

However, builder confidence took a hit, declining after seven consecutive months of increases. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which tracks builder sentiment, dropped from 56 to 50, with a reading of 50 or above indicating optimism for new construction conditions. Mortgage rates' upward trajectory prompted builders to offer incentives in August, with 25% of builders providing sales cuts compared to 22% in July. More builders also introduced incentives to boost sales, marking a 3% increase between July and August.

Alicia Huey, Chairman of NAHB, noted that rising mortgage rates and high construction costs resulting from various factors, including a shortage of construction workers and buildable lots, were dampening builder sentiment. Tighter credit conditions, a consequence of the Fed's aggressive interest rate hikes to combat inflation, are also expected to negatively impact the pace of home building. Bill Adams, Chief Economist at Comerica Bank, points out that rising long-term interest rates affecting residential financing costs are limiting the recovery of single-family construction. Home builders are consequently downsizing new units to enhance affordability.

Affordability Challenges for Home Buyers

Given the current state of the housing market, it's no surprise that many prospective homebuyers are putting their plans on hold. A Fannie Mae Home Purchase Sentiment Index (HPSI) revealed that 82% of consumers have delayed their home buying plans, even if they feel their job and income are stable or improved compared to a year ago. Escalating mortgage rates and persistently high home prices have significantly impacted affordability, pushing the goal of homeownership further out of reach for many, particularly first-time buyers.

For example, prospective buyers with $3,000 monthly budgets, who could have afforded a $500,000 home a year ago, can now only afford a $429,000 home, according to a recent Redfin report. Starter home costs continue to rise, making homeownership less attainable for those with limited down payment savings and incomes struggling to keep pace with rising monthly payments. Monthly mortgage payments in cities like Wichita, Kansas, have surged by a staggering 271% since 2019, mirroring similar trends in historically more affordable regions across the country.

Home Price Trends and the Possibility of a Market Crash

Despite indications that home prices may be softening in certain regions, the housing affordability crisis is likely to persist due to meager housing supply, ongoing high mortgage rates, and sales prices that approach the record-high median existing-home sales price of $413,800 seen in June 2022. Although the median existing-home sales price slid from $410,200 to $406,700 between June and July, it still marked a 1.9% increase from a year ago, according to NAR.

First-time homebuyers face challenges in affording starter homes, with a recent report indicating that they would need to earn about $64,500 annually, reflecting a 13% increase compared to a year ago. Starter home prices reached an all-time high of $243,000 in June. Although those earning $75,000 a year can afford a $256,000 home, properties in this price range or lower accounted for only 23% of existing home listings in April, according to a Realtor.com and NAR Home Affordability & Supply Report.

The Likelihood of a Housing Market Crash in 2023

Despite price declines in certain areas, the likelihood of a housing market crash—a sudden drop in unsustainably high home prices due to reduced demand—remains low. Experts highlight that homeowners today are in a much more stable position compared to those who weathered the 2008 financial crisis, with many homeowners holding positive equity in their properties. Nicole Bachaud, an economist at Zillow, notes that homeowner equity is currently at its highest level in decades, providing a substantial buffer against foreclosure.

Foreclosures in 2023

Foreclosure rates continue to trend downward month over month, according to a recent report from ATTOM, a property data provider. In July, foreclosure filings decreased by 9% compared to June but were up 5% year over year. Foreclosure completions also increased by 4% from the previous month and 9% from the previous year.

Rob Barber, CEO at ATTOM, suggests that the slight decline in foreclosure filings is another sign of a recovering housing market. The combination of rising home prices and increased financial resources available to homeowners has provided more options to avoid foreclosure. Nevertheless, the ongoing unpredictability of the housing market and economic factors make it challenging to predict whether this trend will continue.

Timing Your Home Purchase in 2023 The decision to buy a home in 2023 remains a highly personal one, as purchasing a home is a significant financial commitment. Experts advise against attempting to time the housing market, as it is notoriously unpredictable. Instead, prospective buyers should focus on finding a home that meets their needs, is affordable, and aligns with their financial situation.

Tips for Buying and Selling in Today's Housing Market

For those considering buying in today's competitive market, flexibility is key. Moving to lower-priced housing markets is an option for those who can work remotely or change jobs. Adequate preparation is also crucial, involving a review of financial circumstances, gathering required documents, shopping around for lenders, and improving credit scores. Local real estate agents can provide valuable insights and advantages in a tight market.

Sellers are advised to work with agents to price their homes correctly, as appropriately priced homes attract more attention and competition. Prepping homes for sale in advance and considering online curb appeal can also help attract potential buyers.

In conclusion, the housing market of 2023 presents a multifaceted scenario marked by steep mortgage rates, elevated housing costs, and restricted inventory. Considering these challenges, it is crucial for potential buyers and sellers to thoughtfully evaluate their choices, stay well-informed, and remain flexible in response to the dynamic market landscape. If you are considering buying a new home or selling your current one, don't hesitate to reach out to Scott and the Smolen Team to explore your options and get expert guidance!