Even with interest rates for 30-year fixed mortgages at 7%, housing prices are not expected to drop in 2023, National Association of Realtors chief economist Lawrence Yun said.
The steep increase in interest rates has caused 30-year fixed mortgage rates to more than double from 3% at the start of the year. The result is buying a home is a lot more expensive than it was a year ago.
While this may cause a decline in sales, the reduced demand won’t cause prices to plummet. He expects a 1% increase in housing prices in 2023.
"For most parts of the country, home prices are holding steady since available inventory is extremely low," Yun said. "Some places are experiencing price gains, while some places, most notably in California, are seeing prices pull back."
Part of the reason prices won’t come back down is supply remains limited.
"Housing inventory is about a quarter of what it was in 2008," Yun said. "Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash. Short sales are almost impossible because of the significant price appreciation of the last two years."
Last week’s inflation figures show a 7.7% increase in the Consumer Price Index, which was lower than what some experts had projected. That has given hope to some that the Federal Reserve won’t be nearly as aggressive with rate hikes. The Federal Reserve has indicated it wants to get inflation to 2%.
Another issue, Yun noted, is the gap between the federal interest rate and the interest rate available to individual borrowers.
"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," Yun said. "If we didn't have this large gap, mortgage rates wouldn't be 7%, they would be 5.8%. A normal spread would revive the economy. If inflation disappears, then we'd see less anxiety within the financial markets and lower interest rates.”
Yun expects the number of homes sold in 2023 will dip 7%.