When Will Home Prices Be Affordable Again?
The 30-year fixed rate eased to 7.44% in the week ending November 16, the third consecutive week of decreases. For some context, mortgage rates were in the low 3% range only two years ago.
In the face of high home prices and rates, monthly existing-home sales sagged for the fourth consecutive month. Sales dropped by 2% in September compared to 0.7% the previous month, with all four major U.S. regions posting declines, according to the National Association of Realtors (NAR).
Nonetheless, the housing market remains competitive as demand continues to outpace supply. Would-be buyers with the stomach to stay in the market are gobbling up the limited inventory, especially new homes, as builders continue offering incentives to hopeful homeowners.
Housing Market Forecast for November 2023
So far, the fall housing market season has been a real turkey thanks to a mortgage rate trajectory that seems to know no bounds, elevated home prices and tight housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis.
And a potential government shutdown looms closer, which would further cripple housing market activity.
Yet, there was a speck of good news to be thankful for.
Though widely expected, the Federal Reserve pressed pause on raising the federal funds rate at its latest meeting. The federal funds rate is the benchmark interest rate financial institutions charge each other for overnight loans. The rate hovered near 0% in March 2022. Then the Fed began raising rates to bring down inflation to a 2% goal. Housing market stakeholders care about the federal funds rate as it tends to influence the trajectory of mortgage rates indirectly. For instance, mortgage rates have doubled since the Fed began its aggressive rate-hiking campaign a year and a half ago.
Fed Pauses Again: Will Mortgage Rates Finally Go Down?
The Fed voted to keep the federal funds rate unchanged at its penultimate two-day meeting for the year.
The November decision was the second straight rate pause after policymakers skipped a rate hike in July. After 11 interest rate hikes in this tightening cycle, the current rate range remains between 5.25% and 5.5%, the highest in 22 years.
Fed projections suggest the terminal federal funds rate will reach 5.6% by the end of 2023, implying one more 25 basis-point rate increase is on the table for this year. A basis point is one-hundredth of one percentage point.
Yet, housing market experts are less concerned about one more interest rate hike this year than what the Fed has in store for rates in the coming years.
“Right now, it’s more about what the Fed intends to do rather than what it does,” says Keith Gumbinger, vice president at mortgage website HSH.com. “[W]hile not meaningless, another quarter-point hike at this point won’t change the big picture much, as a lot of the ‘damage’ from higher interest rates is either done or is already in process.”
Gumbinger says what matters most is how long policymakers plan to keep rates elevated and when they’ll begin implementing rate cuts.
Though most experts believe that two rate-hike pauses in a row are a sign that the Fed is finally done with increases, Fed policymakers reiterated at the November post-meeting presser that achieving the goal of a sustainable 2% inflation rate still has “a long way to go.”
Given that outlook, Fed chair Jerome Powell unsurprisingly put the kibosh on the possibility of rate cuts happening soon, suggesting the current high rate range will remain in place for the time being.
Consequently, many housing market watchers forecast mortgage rates remaining elevated for the remainder of this year—and possibly into 2024.
When Will the Housing Market Recover?
For a housing recovery to occur, Gumbinger says several conditions must unfold.
“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Gumbinger says. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”
And, of course, interest rates would need to cool off.
But Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.
“Better that rate reductions happen at a metered pace, incrementally improving buyer opportunities over a stretch of time, rather than all at once,” Gumbinger says.
He adds that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also help the housing market, over time, return to 2014-2019 levels.
Yet, Gumbinger predicts it could be a while before we return to those rates.
Housing Inventory Outlook for November 2023
With many homeowners “locked in” at low interest rates or unwilling to sell due to high home prices, demand continues to outpace housing supply—and likely will for a while.
Despite a slight uptick in resale homes, housing stock remains at near historic lows—especially entry-level supply—consequently propping up demand and sustaining ultra-high home prices.
In the meantime, the monthly supply of new homes, which has been helping to pick up some of the slack, continues on a slow but steady decline that began last fall.
“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group. “We think that it is highly unlikely that the inventory problem will be resolved in 2023.”
Existing Homes
After slipping in August, existing-home stock saw a bump of 2.7% in September, according to NAR. This increase was enough to boost month-over-month unsold inventory by 0.1%. Even so, re-sale inventory currently sits at a scant 3.4-month supply at the current sales pace. Many experts say a balanced housing market has four to six months of inventory.
This blip of an inventory increase comes on the heels of a 2.2% sales drop in September compared to August, down 0.7% in August and a whopping 15.4% from a year ago.
Save for a slight bump in April, year-over-year home sales have trended down markedly since February of this year—and the near term isn’t showing much promise for improvement. Pending home sales—a gauge for future existing-home sales—which inched up by 1.1% in September were down 11% from a year ago.
“Despite the slight gain, pending contracts remain at historically low levels due to the highest mortgage rates in 20 years,” said Lawrence Yun, chief economist at NAR in a press statement.
Despite these historic lows, high home prices remain steady due to the ongoing constrained inventory situation.
Sidelined Home Buyers See No Affordability Relief in Sight
Housing affordability dropped to a new historical low in August, according to the NAR Affordability Index, with home buyers facing the worst affordability conditions in nearly four decades.
Given this, it’s not surprising that, in September, 84% of consumers reported putting home-buying plans on hold, according to the latest Fannie Mae Home Purchase Sentiment Index (HPSI). That’s up 2% from the previous month.
“Consumers are also not seeing much affordability relief in sight, as they continue to expect home prices to increase in the next 12 months,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, in a press statement. “They also indicated that their personal economic situations are showing signs of strain, including lower year-over-year household incomes and a reduced sense of job security.”
Duncan says this all suggests home purchase affordability will remain a problem for the foreseeable future.
Other indices also paint a bleak picture.
For instance, the typical monthly mortgage payment is at an all-time high of $2,866, according to a Redfin report. The figure was $2,395 a year earlier.
The Federal Reserve Bank of Atlanta National Home Ownership Affordability Monitor (HOAM) Index also plummeted in August to an all-time low of 67.3. A reading below 100 indicates that median household income cannot cover annual costs associated with owning a median-priced home or more than 30% of yearly income is going towards homeownership. An individual’s total housing costs should be at or below 28% of their gross income.
To put today’s affordability challenges into context, a homeowner living in a typical metro area during the second quarter of 2023 needed to earn at least $99,600 to afford monthly housing payments, up from $52,600 three years ago, according to Harvard Joint Center for Housing Studies data.
These Would-Be Home Buyers Have It the Worst
First-time buyers hoping to land a home at a lower price point are likely having the hardest time.
Starter home costs are on an upward trajectory that has put homeownership further out of reach for those already constricted by limited down payment savings and incomes that can’t keep pace with costlier monthly payments, according to Realtor.com data.
For example, first-time homebuyers hoping to buy a starter home will need to earn about $64,500 a year—that’s 13% more than a year ago, according to a Redfin report. A typical starter home hit an all-time high of $243,000 in June.
Weakening affordability conditions for first-time buyers is further underscored in NAR’s latest First-Time Homebuyer Affordability Index. The preliminary second-quarter reading came in at 61.4, compared to 67.4 in the first quarter. A reading of 100 indicates that a family earning a median income earns exactly enough to qualify for a mortgage and afford a typical home.
In other words, the typical first-time homebuyer is nowhere near earning the level of income required to afford a home.
Will the Housing Market Crash in 2023?
Despite some areas seeing price declines, the likelihood of a housing market crash—a rapid drop in unsustainably high home prices due to waning demand—remains low. Experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes.
Even so, with fewer homes selling, Hnatkovskyy sees a price collapse within the realm of possibility, especially in markets where real estate investors scooped up numerous properties.
“If something pushes that over the edge, the consequences could be severe,” said Hnatkovskyy, in an emailed statement.
National home prices rose at an annual rate of 2.6% in August, up from 1% in July, according to the latest S&P CoreLogic Case-Shiller Home Price Index, a leading monthly tracker of U.S. home values. After seasonal adjustment, prices saw a monthly increase of 0.9%, between July and August, up from 0.6% between June and July.
The index hit a new high of 311.5, the highest level since recording began in 1987.
“On a year-to-date basis, the National Composite has risen 5.8%, which is well above the median full calendar year increase in more than 35 years of data,” said Craig J. Lazzara, managing director at S&P DJI, in the report. “The year’s increase in mortgage rates has surely suppressed housing demand, but after years of very low rates, it seems to have suppressed supply even more.”
Should I Wait Until 2024 To Buy a Home?
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.
Use a mortgage calculator to estimate your monthly housing costs based on your down. But if you’re trying to predict what might happen next year, experts say this is probably not the best home-buying strategy.
“The housing market—like so many other markets—is almost impossible to time,“ says Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “The best time for prospective buyers is when they find a home that they like, that meets their family’s current and foreseeable needs and that they can afford.”
Gumbinger agrees that it’s hard to tell would-be homeowners to wait for better conditions.
“More often it seems the case that home prices generally keep rising, so the goalposts for amassing a down payment keep moving, and there’s no guarantee that tomorrow’s conditions will be all that much better in the aggregate than today’s.”
Divounguy says “getting on the housing ladder” is worthwhile to begin building equity and net worth.
Pro Tips for Buying in Today’s Housing Market
1. Move to a lower-priced housing market if you can switch jobs or work remotely
2. Get all your ducks in a row in advance so you can act fast—review your financial situation, gather required documents, shop multiple lenders and strengthen your credit score
3. Check prices and listings regularly to beat out the competition
4. Know how much your monthly payment will be—complete with taxes—and how well that fits into your budget
Pro Tips for Selling in Today’s Housing Market
1. Work with a real estate agent to get your pricing right, encourage buyer competition and sell faster
2. Get your home in shape to sell sooner rather than later
3. Set up your home’s online curb appeal
4. Include a 3-D home virtual tour or an interactive floor plan in your listings for more page views and saves