What this means for demand, mortgage rates

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  • Experts predict a possible recession in 2023.
  • A downturn in the economy would hit a housing market that has been boiling for years.
  • But there is still a shortage of available accommodation and prices are not expected to drop.

The US economy is in a strange place – and that means the housing market is too.

As rising interest rates do their job of dampening demand, fears of a


recession

are on the rise. Potential buyers may be wondering what all of this means for their dreams of owning a home.

In short, price growth will likely slow as demand falls, and mortgage rates have started to decline slightly after surging earlier this year. But with a persistent lack of homes available for sale, an economic downturn won’t bring a new era of affordability to the US housing market.

A recession could hit in 2023 – but it will likely be mild

Although there are plenty of jobs, wages are rising, and expenses are rising, some Americans are going through a tough time.

Inflation reached its highest level in forty years while consumer confidence fell to its lowest level in ten years. Rising interest rates have also made all forms of borrowing, from car loans to mortgage payments, more expensive than they were just a few months ago.

As the economy collapses, fear of a possible recession is spreading. And while experts think that’s unlikely to happen in 2022, there are signs of an economic slowdown in 2023.

“Financial conditions have tightened significantly and the economy is slowing faster than expected as markets adjust to tightening guidance from the Federal Reserve,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. , in a statement referring to the Fed’s interest rate. hikes that began in March in a bid to cool exorbitant demand across the economy.

HSome prices will likely continue to grow in most markets, but at a slower pace

If a recession is on the horizon for 2023, it could mean the housing market is bracing for a cooling after years of strong demand leading to higher prices – but that doesn’t mean home ownership will become more affordable for potential buyers.

“If the economy were to weaken or a recession were to hit, it would further weaken demand,” Len Kiefer, chief economist at Freddie Mac, told Insider, adding that this could cause price growth to decelerate.

Although home prices have actually fallen in some markets, they continue to rise in other parts of the country, but at a much slower pace. While price growth is expected to slow further, Kiefer says that doesn’t mean prices will go down.

“We expect house price growth to slow over the summer,” Kiefer said. “However, we still expect house price growth to remain positive. This means that, coupled with higher mortgage rates, homebuyer affordability will be further stretched.”

Pandemic-era lowest mortgage rates are gone

Pandemic-era mortgage deals are over and that’s making homeownership more expensive.

Although mortgage rates fell slightly in May, they are much higher than they were in 2021.

According to Freddie Mac, the average US fixed rate for a 30-year mortgage fell to 5.10% last week from a pandemic high of 5.30% – but that’s significantly up from a pandemic low of 2.68% in December 2020.

As mortgage rates put further pressure on housing costs, mid-priced home buyers are looking at monthly mortgage payments more than $400 higher than a year ago.

There are still not enough homes on the market to meet demand

With rates generally on the rise and inflation putting pressure on day-to-day costs, Americans will likely find it harder to afford a home, let alone buy a new home in 2023.

“Not only is deteriorating home affordability an issue for potential entry-level buyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and put their homes up for sale, which which will likely weigh on sales,” he added. said Duncan.

To boost housing market equilibrium, house prices will need to fall – and that means more homes will need to be built in 2023. “The cooling market is needed to restore the balance between supply and demand” , Kefer said. “The rate of house price growth over the past two years is not sustainable over the long term.”

Even with more new listings on the market, the number of homes for sale is still at historic lows.

To address rising house prices and the lack of housing affordability in the country, the Biden administration has launched an initiative that proposes using federal dollars to boost the supply of affordable housing. But there’s a catch — the plan will unfold over the next five years.

This means that Americans are unlikely to see a surplus of new inventory introduced into the real estate market next year. With a possible recession looming and mortgage rates near 13-year highs, the country’s lack of housing inventory will continue to dampen homebuyer affordability in 2023.

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