2022 Housing Market Assessment: A Story Of Two Halves

Read Time:7 Minute, 43 Second

2022-12-28 20:25:24

It’s lastly over! The loopy, unpredictable, and simply plain bizarre housing market of 2022 has ended. Although analysts like me will possible be learning the 2022 housing marketplace for years to return, we will lastly take a fast look again at what occurred this yr and infer what is perhaps in retailer for the yr to return.

2022 was a story of two halves. January by means of Might/June was one sort of market, and July by means of December was a really totally different market. It’s not potential to find out the shift’s precise date, but it surely was inside this timeframe.

The First Half

By means of the primary half of 2022, we noticed a continuation of the wild appreciation that outlined 2021. Each main variable that influences housing costs was placing upward strain available on the market. There was sturdy demographic demand fueled by millennials reaching their peak home-buying years. A decade of underbuilding contributed to a nationwide housing scarcity. Stock was virtually non-existent. And, after all, mortgage charges had been traditionally low. 

However then, issues modified. In March of 2022, the Federal Reserve began elevating the federal funds charge, pushing up bond yields and mortgage charges. The change of coverage truly spiked demand as homebuyers and sellers rushed to transact earlier than the total impression of upper mortgage charges had been felt. This, mixed with regular seasonality, allowed the celebration to proceed and for costs to proceed going up for a number of further months.

The Second Half

Finally, the impression of skyrocketing mortgage charges took maintain. Already going through ultra-high house costs, greater mortgage charges priced many homebuyers out of the market, and demand fell. When demand falls, stock tends to rise, which is strictly what occurred.

Months of Provide (2016-2022) – Redfin

As stock rose, sellers who had been drunk on energy during the last a number of years began to lose their leverage. Slowly, patrons began to have extra choices, and a little bit of stability returned to the market, pushing down costs.

Screen Shot 2022 12 28 at 3.23.02 PM
Median Gross sales Value (2016-2022) – Redfin

A number of the decline since June is seasonal, however as of December 2022, costs are down virtually 10% off their Might peak, and a typical seasonal decline is 5%-7%. The descent from the summer season peak was deeper in 2022. 

It’s value noting that though costs are declining, they aren’t in free fall. Costs stay up year-over-year, and stock has began to reasonable. Mortgage charges have come down from October to December, and there are indicators that the drop-off is turning into much less steep. At this level, we stay in a correction, however not a crash. 

What Will Occur In 2023?

Will we see a continuation of the downward development we’re in now? Will issues worsen? Or might the market reverse? 

To me, it’ll once more be a story of two halves. I imagine within the first half of 2023, we’ll see a continuation of the market we’re in now: sellers don’t wish to promote, and patrons don’t wish to purchase. After all, offers are nonetheless underway, however I count on gross sales quantity to stay effectively beneath what we’ve seen for the final 7-10 years. Though inflation is moderating, there stays an excessive amount of uncertainty within the financial system for the market to stabilize totally.

Hopefully, through the first half of 2023, we are going to see inflation come down and get extra readability about what is occurring with the worldwide financial system. However what actually issues for housing quantity and residential costs is about one factor: affordability. If housing stays as unaffordable as it’s now, gross sales quantity and appreciation will keep low. If affordability recovers, I count on the housing market to stabilize and even perhaps see a modest restoration within the second half of 2023. 

It sounds overly simplistic, however housing is simply too unaffordable in present market circumstances. Some estimates say that housing is the least inexpensive it’s been in over 40 years. Till this modifications, the housing correction is right here to remain. The housing scarcity and demographic demand haven’t gone anyplace. As quickly as affordability improves, I believe housing market exercise will resume.

Will Affordability Enhance? 

Affordability is made up of three elements: 

  • Actual wages
  • Residence costs
  • Mortgage charges

Affordability can enhance if wages go up or house costs and/or mortgage charges decline. Let’s take a fast take a look at if any of this stuff can occur. 

Actual wages

In line with the Bureau of Labor Statistics, actual (inflation-adjusted) wages are down about 2% year-over-year however have ticked up about 0.5% since September. Nominal (not inflation-adjusted wages) is definitely up quite a bit, however inflation is just too excessive and wipes out all of these features.

Actual Earnings November 2021 September 2022 October 2022 November 2022
Actual common hourly earnings $11.21 $10.95 $10.95 $11.00
Actual common weekly earnings $390.20 $377.71 $377.80 $378.42

Though it’s a constructive signal that actual wages have ticked up a bit, it’s very modest. It’s potential that, as inflation moderates, actual wages will go up—however I discover it unlikely that that may occur in a significant method. To me, issues a few slowing financial system will sluggish the tempo of wage progress alongside inflation. Subsequently, no actual progress on actual wages will probably be made. 

Housing costs

One space the place affordability is probably going to enhance is house costs. Residential actual property costs will possible see year-over-year declines nationally, making properties extra inexpensive. For affordability to essentially enhance, we’d most likely need to see costs drop greater than 10%, and it’s very unclear if that may occur. If costs drop in any respect, and by how a lot, it’ll rely very a lot on mortgage charges.

Mortgage charges

Mortgage charges may be complicated, particularly just lately. The Fed continues to lift the federal funds charge and has signaled they intend to maintain doing so into 2023. But, mortgage charges are falling. What’s occurring right here? 

Mortgage charges will not be straight tied to the federal funds charge. As a substitute, it is rather intently tied to the yield on 10-year treasuries. So, in a method, mortgage charges are extra influenced by bond buyers than by the Fed (though bond buyers are extremely influenced by the Fed. It’s complicated, I do know).

Over the past a number of weeks, bond yields have fallen for 2 causes. First, inflation is moderating sooner than anticipated, which tends to trigger a rally in bonds, sending bond yields down. 

Secondly, there are fears of a world recession. These fears are inclined to immediate international buyers to hunt the protection of U.S. Treasury bonds, which pushes bond costs up and bond yields down. When bond yields fall, mortgage charges additionally are inclined to fall, which is strictly what we’re seeing. So, mortgage charges might fall subsequent yr and finish the yr someplace between 5.5% and 6.5%, down from the newest peak of seven.23% in October 2022. 


If my premise that the 2023 housing market hinges on affordability is right, then there are two believable outcomes for the second half of 2023. 

First, mortgage charges fall, together with modest value declines (lower than 10%), combining to extend affordability through the second half of 2023. This is able to possible trigger a bottoming of the housing market in Q1 2024, and we’d begin to see progress available in the market once more come early 2024. 

The opposite choice is affordability doesn’t enhance in 2023, most likely because of persistently excessive inflation and mortgage charges. If that occurs, the second half of 2023 will seem like the primary half of 2023, and we’re possible in for an extended correction. On this situation, we are going to most likely see housing costs drop 10-20% over the subsequent two years, and we received’t see a bottoming of the market till late 2024/early 2025. 

It’s powerful to know what is going to occur, given the quantity of financial uncertainty. As of this writing, I believe the primary situation is extra possible given the current traits in inflation and bond yields. However each choices are fairly possible at this level. Sadly, the subsequent twelve months are cloudy at greatest. 

What do you suppose will occur in 2023? Let me know within the feedback beneath. 

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Observe By BiggerPockets: These are opinions written by the writer and don’t essentially characterize the opinions of BiggerPockets.

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