The impact of the mortgage rate lock-in effect and the persistent challenges related to affordability have been more significant than initially projected, according to Realtor.com’s revised 2023 Housing Forecast.
While mortgage rates have cooled more than projected, the impact of homeowners with low interest rates unwilling to reenter the relatively higher mortgage rate environment has had strong impact on sales and resale inventory. After projecting existing-home sales would decrease by 14.1% and resale inventory would increase by 22.8%, Realtor.com revised its projections to a 15.8% decline in existing-home sales and a decrease in resale inventory by 5% in 2023.
Home price appreciation has also not continued at the pace Realtor.com projected for 2023 due to the impact of affordability on demand, especially in the Western region. As a result, the organization revised its home price forecast from growth of 5.4% to contraction by 0.6% for 2023. Realtor.com also downwardly revised its forecast for single-family housing starts from a 5.4% decline to a 19.6% decline.
While home prices are showing signs of cooling, high mortgage rates have prevented mortgage payment costs to improve from 2022. While below October 2022 peaks, monthly payment costs are higher compared with a year ago and likely will remain elevated through the fourth quarter of 2023, according to Realtor.com. On average, monthly payments in 2023 are expected to be 10.5% higher than in 2022.
The current conditions of high housing prices and elevated mortgage rates are likely to cause renters to delay home purchases and increase demand for rental properties through the end of 2023, according to Realtor.com. However, due to higher costs associated with moving to a new residence compared with renewing a lease, coupled with the widening disparity in growth rates between rental prices for new tenants and lease renewals, existing renters are more likely to stay put than move.
The pace of inflation has also moderated in 2023 at a slower pace than initially forecast by Realtor.com. Despite improvements in both the Personal Consumption Expenditure price index and the Consumer Price Index, both indices remain more than double the Federal Reserve’s inflation target of 2%.
“After long believing that the economy would not be able to thrive with short-term rates above 5%, which would necessitate a quick retreat from the Fed’s rate hikes, financial markets and investors are repositioning themselves for higher rates for longer,” Realtor.com wrote in the revised forecast. “Thus, even though the Fed’s views haven’t changed, investors have some catching up to do, and we may see near-term upward pressure on interest rates, including for mortgages, which have recently climbed back toward 7%, before a gradual decline later this year.”
