The US housing market in 2023 will not be a buyer's or seller's market

The US housing market in 2023 will not be a buyer's or seller's market.

The Fed has hit both sides of the housing market in 2022. Rising mortgage rates have kept homebuyers out of reach for many, while increasing construction costs have made it harder for sellers to lower prices for new homes.

The National Association of Home Builders (NAHB) declared a recession in the housing market in August. (Industries can stagnate while the broader economy is not.)

NAHB chief economist Robert Dietz cites data supporting this call: Existing home sales, mortgage applications, and single-family starts are falling at the third-year rate. "We're seeing decade-low readings for almost every indicator you can imagine of housing," Dietz says.

Normally this would lead to a collapse in prices. But in 2023, with the market yet to recover from two years of supply chain delays? Get ready for something less traditional.

Home prices will continue to rise in 2023

According to NAHB, construction expenses have been up 35% since COVID, while mortgage rates have doubled. Higher costs and interest rates have left home builders with fewer buyers and more expenses.

Some builders could offer discounts on home prices because of the profits they were making at the height of the market. The John Burns Real Estate Consulting Group, which tracks earnings for builders, found its 2022 profit margins were 27.3% and 28% in the third and second quarters, respectively, says Eric Finnegan, director of building products at John Burns. In a normal year, those margins average 20% or 21%.

Builders sold at unusually high prices early in the pandemic due to high demand and low supply. Finnegan said that many builders wait to price homes before they're ready to sell because the volatile prices of materials have left them unsure of what price to charge.

According to NAHB survey data, a third of construction companies have cut their prices in response to lower demand, with an average cut of 8%. But most builders are working to raise or maintain their prices.

"Sellers have been having a hard time getting a handle on how quickly the housing market is changing," says Ali Wolf, chief economist at housing market research firm Zonda. This slowdown has been happening for six months in many markets across the country. There are still a lot of consumers who want to own a home but aren't ready to buy."

Much more popular than home price reductions right now, Dietz says, are buyer incentives such as a mortgage rate reduction offer, where the borrower pays more money upfront to get a lower interest rate.

This could be why Realtor.com still expects the median home price to rise 5.4% next year over year — or why Zillow expects median home prices to fall only 1% in 2023.

Apartment construction will slow in 2023

Often, the Federal Reserve institutes interest rate increases to reduce demand to match supply. But higher interest rates reduce demand and supply for new homes, with higher financing costs for mortgages and loans required to develop plots for new construction.

As single-family housing slumps throughout 2022, apartment building has been a bright spot for the construction industry. But as financial conditions tighten, the job market loosens, and rents fall, construction workers will also become warier of multi-family projects, says Dietz.

What would you prioritize in the construction industry, then? Remodeling will likely dominate the industry, Dietz says, as well as single-family homes built for rent, which made up 3% of the homebuilding market in 2019 and now makes up 12%, as many families still need homes but can't afford them. 

Supply chain hurdles persist.

One of the biggest stories in 2022 for the US economy has been that most of the finance world has underestimated how difficult it will be for global supply chains to recover from the shutdowns in 2020 and 2021.

In December 2021, Wolf says, 90% of builders told Zonda they were experiencing supply disruptions. In December 2022, that number dropped to 48%.

"We're nowhere near pre-pandemic levels, but we're past the worst point of the supply challenges," Wolf said.

While the price of wood rose and cooled in 2021, so did the expense of other housing materials. The builders needed help finding everything else the house required, including a kitchen sink. One-third of respondents to a recent survey told NAHB that they are currently experiencing a shortage of electrical transformers. Windows and hardware are backed up, too, says Builders John Burns, Finnegan says.

0/Post a Comment/Comments