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Navigating Stormy Seas

This piece originally appeared in the December 2022 edition of MReport magazine, online now.

As we close the door on 2022 and begin the next chapter known as “2023,” the housing market sits in a state of flux where tentative buyers are at the mercy of record high prices and rates lingering above the 6.5% mark.

December began with the 30-year fixed-rate mortgage (FRM) averaging 6.49%, with optimism growing around the hope that the Federal Reserve may slow the pace of its rate hikes. Despite the dip in rates, continued economic uncertainty lingers, hindering first-time buyers from entering the market and finding the home of their dreams. Continued high rates have also stunted the refi market, thus dragging down overall application volumes.

As we enter 2023, much speculation regarding housing uncertainty remains. MReport has gathered a panel of industry experts to impart their insight on what 2023 may bring and exactly where the market is heading in the foreseeable future. Panelists include:

Daren Blomquist
VP of Market Economics
Daren Blomquist serves as VP of Market Economics at Auction.com, responsible for the analysis and forecasting of complex macro and microeconomic data trends within the marketplace and industry to provide value to both buyers and sellers using the Auction.com platform. Blomquist’s reports and analysis have been cited by thousands of media outlets—including all the major news networks and leading publications such as the Wall Street Journal, the New York Times, and USA TODAY. Blomquist has been quoted in hundreds of publications and has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

Dr. Robert Dietz
Chief Economist & SVP of Economics and Housing Policy
National Association of Home Builders
At the National Association of Home Builders (NAHB), Dr. Robert Dietz’s responsibilities include housing market analysis, economic forecasting and industry surveys, and housing policy research. He has published academic research on the benefits of homeownership, federal tax policy, and other housing issues, and has testified before Congress on real estate policy issues. He is often cited on housing and economic issues in the Wall Street Journal, CNBC, and other media sources. Prior to joining NAHB in 2005, Dietz worked as an economist for the Congressional Joint Committee on Taxation, where he was the committee’s real estate expert.

Danielle Hale
Chief Economist
Realtor.com Chief Economist Danielle Hale is responsible for developing and translating real estate trend data into consumer and industry insights. She also leads Realtor.com’s team of industry analysts and economists with the goal of providing deeper and broader housing insights to people throughout the home journey, industry professionals, and thought leaders.

Odeta Kushi
Deputy Chief Economist
First American Financial Corporation
As Deputy Chief Economist for First American Financial Corporation, Odeta Kushi prepares analysis, commentary, and forecasts on trends in the real estate and mortgage markets. She conducts research around demographic trends, millennials, and homeownership. She also monitors and analyzes quarterly surveys and economic data related to the housing industry. Top national business media outlets, including CNBC, Yahoo! Finance, and Reuters TV, turn to Kushi for insight and perspective on the forces shaping the housing industry. Her research has been published in leading business and industry trade publications, including the Wall Street Journal, News and World Report, and Business Insider.

Dr. Jessica Lautz
Deputy Chief Economist and VP of Research
National Association of Realtors
Dr. Jessica Lautz is Deputy Chief Economist and VP of Research at the National Association of Realtors (NAR). The core of her research focuses on analyzing trends for both NAR members and housing consumers. Through management of surveys, focus groups, and data analysis, she presents new and innovative ways to showcase results. Dr. Lautz discusses research findings in major media outlets and international presentations. In 2022, Dr. Lautz was named a RISMedia Newsmaker in the “Influencer” category. In 2021, Dr. Lautz also volunteers at Nottingham Trent University as an industry fellow mentoring real estate graduate students.

Rick Sharga
EVP of Market Intelligence
Rick Sharga is the EVP of Market Intelligence for ATTOM, a provider of real estate and property data, including tax, mortgage, deed, foreclosure, natural hazard, environmental risk, and neighborhood data. Sharga has appeared on CNBC, CBS News, NBC News, CNN, ABC News, FOX, Bloomberg, and NPR. He is a founding member of the Five Star National Mortgage Servicing Association (NMSA) and has more than 20 years of experience in the real estate and mortgage industries, including roles as EVP at RealtyTrac, an EVP of Carrington Mortgage Holdings, and CMO for the company’s Vylla business unit, and as CMO of Ten-X and Auction.com, an online real estate marketplace.

Stephanie Singer
Senior Director, Industry Marketing and Communications
With more than 25 years of experience with for-profit companies, associations, public relations agencies, and consulting firms, Stephanie Singer excels at strategic planning and execution, cross-department organization, and staff development. She has worked for NAR for more than 12 years, following a brief stint as a licensed real estate agent. As a PR professional, she has represented clients that included the Mortgage Insurance Companies of America, the Federal Home Loan Bank of San Francisco, and the National Community Reinvestment Coalition.

Tim Rood
Head of Government and Industry Relations
Tim Rood serves as Head of Government & Industry Relations for SitusAMC, where he interfaces with policymakers and influencers on matters related to residential, multifamily, and commercial industries. Rood also manages SitusAMC’s Advisory Group, where he is a trusted advisor to senior executives of banks and independent mortgage bankers. Prior to joining SitusAMC, Rood served as Chairman of The Collingwood Group, which he co-founded in 2008. Rood brings nearly 30 years of mortgage industry and entrepreneurial experience to SitusAMC, and is a regular contributor to various national media outlets, including CNBC, Bloomberg Television, FOX Business News, YahooFinance TV, the Washington Post, the New York Times, the Wall Street Journal, and American Banker.

Where do you see the direction of the housing market heading over the next 12 months?
Blomquist: Local real estate investors who buy on Auction.com are signaling a continued downshift in the housing market through at least the end of 2022, and likely into the first quarter of 2023. Back in March, those same investors signaled the current market downshift when they started building a bigger discount cushion into their winning bids at foreclosure auctions. If sellers finally get the memo and reset their pricing expectations, home sales could bottom out in the first quarter and then start rebounding during the spring selling season in 2023. The tradeoff to that rebound in home sales would likely be negative home price appreciation, particularly in markets that experienced the biggest price gains during the pandemic housing boom. I would expect home price declines to stay in the single digits in most local markets, absent any additional shocks or surprises.

Dr. Deitz: Single-family construction will decline in 2023, after posting a drop in 2022, the first time this occurred in 11 years. Multifamily construction will begin a decline in 2023 as well, as demand weakens with a rise in unemployment and a large amount of new supply coming online. Home remodeling should perform the best of the three sectors, as people move with less frequency.

Hale: The housing market, as a whole, will face ongoing challenges in the next 12 months, as it resets to a higher interest rate environment that may stick around for longer than many initially expected. As such, we expect home sales to remain relatively weak. As buyer purchasing power is diminished from higher rates, fewer home shoppers can keep up their search. This has the benefit for those who can navigate higher rates and prices of reducing competition in the housing market.

For sellers, however, lower buyer competition means they can expect selling to take longer than it has in the recent past. While home prices are expected to remain high, even increasing on a year-over-year basis, buyers will have more negotiating power, so sellers will have to make more concessions than they have over the last two years.

Kushi: We are looking at house prices, and what that path will be for house prices. We are already tracking some markets that are experiencing price declines from their peak. I do expect that market list to grow or markets to experience declines from peak. You cannot sustain double-digit house price growth alongside 7% mortgage rates. The affordability picture has worsened, so I expect that to continue into next year, particularly as the Fed is not really tapping the brakes on quantitative tightening.

Dr. Lautz: Given the rise in interest rates and the continued rise in home prices, NAR’s forecast is that home sales will be down 7% year-over-year in 2023. However, the expectation is that home prices will continue to rise on a year-over-year basis but at a more moderate pace due to the lack of inventory.

Rood: The trajectory of home price appreciation (HPA) has been slipping most of the year due to affordability challenges given the Fed’s aggressive rate increases. However, HPA is still positive for the year in most markets due to supply and demand imbalances. The markets with the most downside risk over the next 12 months are ones that attracted the most migration during the pandemic, and medium to high-end markets that are disproportionately impacted by higher rates.

Sharga: It is hard to see the housing market pick up much momentum until mortgage rates fall and inventory improves, so it is likely that 2022 home sales will end the year about 15% below 2021 numbers and then decline slightly again in 2023. Prices on a national basis will probably fall by about 5% from 2022 peaks to the 2023 trough—but conditions will vary quite a bit from location to location. California home prices, for example, could take a 10% dip, while markets in the Southeastern states may continue to increase. This market correction is likely to be much more localized than what we saw during the 2008 market meltdown—and much less severe as well.

Whether we are in it or about to be in it, there is lots of talk about a recession, but what are you seeing as far as the impacts of that on the general economy, and how that will trickle into the housing market?
Kushi: You need consumer competence to make the biggest financial decision of your life, and I think we have not found a way to avoid the business cycle, so I do think a recession is probably in our future, although I will not say when or how big. Recessions come in different shapes and sizes, so it is possible we could have one and it could be very short lived. We know the pandemic recession was very short, and the Great Recession was very long, but that recovery period was also incredibly long, so I think the impact will be a further pullback in purchase demand.

One thing I am interested in is household formation because fundamentally, that is what drives both rental and purchase demand. The slowdown in rental prices is still positive, but year-over-year, it is starting to slow down. I think a big reason for that is that rental formation is slowing. You have roommates that, instead of “decoupling”—going out on your own and either buying a place or renting a place on your own—many are choosing to stay put because they are nervous about the state of the world. It could be their job, the labor market, the economy … whatever it may be, they are choosing to stay put with that roommate or are staying with their parents and not moving out. I think that that will result in slower rent depreciation and prevent that transition from renting to owning.

I do not think that the recession will be good for the economy in the near term, but ultimately, what we find is that the housing market tends to lead economies out of recessions because rates typically start to come down, the Fed brings rates back down, and then those who do feel confident and have equity in their homes begin to transact. Housing has a big multiplier effect on the economy, so it can pull us out of that recession.

What can mortgage professionals do to keep their pipeline full amid an erratic housing marketplace?
Blomquist: Mortgage professionals who can find and capture sellers who need to sell and are willing to adjust pricing to sell will fare the best at keeping their pipeline full over the next 12 months given that mortgage rates are not expected to drop much over that time period. Of course, mortgage professionals need to continue to curate their pool of potential buyers as well, but those motivated sellers are the oil that is needed to keep a pipeline running smoothly given these erratic housing market conditions.

Dr. Lautz: The housing market is always going to change. It has changed from a refinance market to a purchase market in the last six months. Look for opportunities where buyers had been shut out, there now could be a chance for first-time buyers to look at the housing market with a new perspective.

Sharga: It has been a difficult transition for mortgage professionals, who went from not being able to handle the volume of requests for rate-based refinance loans, to fighting for the limited number of purchase and cash-out loans being applied for today.

First, make sure you have the right products to offer. There is still a record amount of homeowner equity in the market—$29 trillion, according to Freddie Mac—and since many homeowners have opted to stay put while the market goes through its convulsions, there is likely to be interest in tapping into that equity to make home improvements (both for immediate benefits and for increasing the home’s value for a sale later). Having home equity loans and HELOCs as part of your product offering should help.

Many potential buyers—and even cash-out refinance candidates—might be inclined to take out an adjustable-rate loan (ARM) to save a point or so on the interest rate. Having ARM options at your disposal today could be a differentiator.

Second, marketing your services has probably never been more important than it is now. Strong marketers tend to get more than their fair share of available business during highly competitive periods like the one we are in now. This does not require Super Bowl ads, by the way. Mining your network for referrals—and offering reciprocal referrals—is virtually a no-cost way to generate leads. Working on your contact database and letting your contacts know about various loan products and how they can be used should be part of your everyday activity.

Leverage social media, especially consumer-facing social channels like Facebook, Instagram, Snapchat, and Twitter, to keep in front of potential borrowers when they ultimately decide to explore a purchase, refinance, or home equity loan.

Singer: People always need a place to live and will still buy and sell homes even in the most difficult of markets. In times like these, it is beneficial to go back to the basics and see where you can improve your everyday activities; identify gaps in your business or market; and reevaluate the tools and resources you use to boost lead generation, build new relationships, and find new clients.

There are undoubtedly going to be challenges ahead for mortgage professionals, real estate agents, and homebuyers and sellers in the coming year, and it will be important for everyone to communicate and be proactive and flexible, but we are optimistic about the industry over time.

What advice would you give to a first-time buyer intent on buying a home in this current economic environment?
Blomquist: Over the next 12 months, first-time buyers will likely have a better window of opportunity for purchasing a home than they have in the last decade. This does not mean a total fire-sale opportunity as we saw back in 2009 and 2010, but buyers may still lose some equity in the short term in exchange for buying near the bottom of the market. This window of opportunity is ideal for buyers who plan to live in the home for at least five years and who can comfortably afford the monthly house payment. In other words, they are not severely stretching their finances and quality of life just to take advantage of the window of opportunity.

Dr. Deitz: It is a buyer’s market now, but a frustrating one due to low affordability attributable to higher interest rates. I would advise first-time buyers to expand the geographic area of their search, given the proliferation of new work-from-home options. I would also advise them to consider a townhouse or other light-touch density housing. They should be prepared for competition to increase in 2024 when interest rates will increase (a good thing), but buyer competition will grow again.

Hale: It can be a good time to buy a home even in challenging market conditions if it is the right time for you. Given the housing and economic shifts that are ahead, setting yourself up for success means sticking to your budget and making sure you have a savings cushion left over for emergencies even after the home purchase. In this environment where home prices are high and mortgage rates have upped the cost of buying, I know this is hard to do, but it is important.

When you are shopping, keep in mind that you want to find a home that will fit your needs not only today but also for the next five years or so. In other words, think medium term. You want a home that will last beyond the short term, but your first home does not have to be your forever home.

Kushi: I think millennials have already been renting longer simply because of lifestyle choices. So, everyone is getting married later, having kids later, and deciding to buy a house later. They also have more student loans paid off on average, so we found that that tends to delay, rather than prevent, homeownership. There are a lot of homes in the pipeline for builders, so that will be new net supply added to the market, which will take some of the pressure off house prices. We are still underbuilt even with all those homes in the pipeline. New homes only comprise approximately 10%-12% of total inventory, so the bulk of inventory is existing home inventory. Until those existing homeowners sell, we will still be under-supplied.

When we get through this point in the housing cycle, rates may be stabilized and house prices may be stabilized, and all that shadow demand that you have from millennials, who right now are a little too nervous to jump back in. I think they will have more supply to work with than during the pandemic, which I am sure will be welcome news and some relief for them, but we have not been building in that starter-home price range, so I still think it will be competitive at that price point. The interesting thing, though, is that millennials have been historically skipping that starter-home price range. We saw over the pandemic that they are going from the three- to five-year home, which is traditionally what a first-time homebuyer does, and skipping right to the forever home.

Dr. Lautz: This is a moment in time when first-time buyers may have an opportunity to enter the market easier than over the last two years. There was a frenzied pace in the housing market, which had pushed first-time buyers, often with FHA or VA mortgages, to the sidelines. As some buyers have retreated, high-income, first-time buyers may take advantage of the market right now.

Rood: Do not overreach. Have a budget and stick to it. You may have to “drive until you comply” to find homes in your budget, but if you are in an industry where you can largely work from home, seek out secondary and tertiary markets for better value.

Sharga: First, make sure your household finances are in order and that you are ready for the kind of financial commitment that homeownership demands. Do not overextend yourself to buy a home. Second, ask yourself if you are buying a home with the intention of staying there for more than the next year or two—that way you can weather the storm of possible home price fluctuations. Then, if you can find a home that you like and can reasonably afford, buy it! Mortgage rates are likely to go back down into the 5% range in the next year or two, and you may be able to refinance into a better loan than the one you will take out initially to buy the house. For most (not all) families, homeownership is still a better long-term option than renting. Waiting for home prices to “crash” usually is not a great strategy, and it is highly unlikely that we are going to see prices plummet in most markets over the next few years.

What is the biggest component of the housing market that needs correcting in order to get things on the path to rebalance?
Blomquist: Sellers adjusting pricing expectations and taking what the market will give them in terms of price.

Dr. Deitz: Somewhat lower interest rates will help bring balance to the marketplace. The era of rates in the 3% range is likely over for some time, but rates moving below 6% would help stoke housing demand. On the supply side, we need policies that will help reduce the cost of construction and reduce ineffective regulations.

Hale: Without a doubt, affordability is the biggest challenge to the housing market, but affordability itself can be remedied in one of several ways. In Realtor.com’s forecast report, we discuss the trifecta of budget barriers in mortgage rates, home prices, and incomes. Adjustment in any of these three key variables will help put housing on a path to better balance. Fortunately, with a still-robust labor market, we expect income growth to continue. In the early part of the year, we expect mortgage rates to climb, but toward the second half of the year, we may see them dip back down, which will help. And finally, while home prices are expected to keep advancing on a year-over-year basis; the gains have slowed dramatically. That is a step in the right direction for potential buyers.

Additional construction is needed to help alleviate the long-term housing shortage that the market continues to grapple with. This shortage has prevented more drastic adjustments in price, even in the face of short-term weakness in housing demand. But in the longer run, the market will work better for everyone if housing is not in such short supply.

Dr. Lautz: The housing market needs more affordable housing inventory. Rates have moderated in the last three weeks to under 7%, but buyers need affordable inventory to be able to make moves in the market.

Sharga: In the short-term, mortgage rates need to drop back down into the 5% range, and home price appreciation needs to continue to slow down—or even decline modestly in some markets—while wages rise so that affordability is less of a problem. In the long run, the market simply needs more inventory—a lot more inventory—to correct the imbalance between supply and demand that helped fuel the home sales boom of the last few years. Much of this will need to come from homebuilders increasing production volume, but it is important to acknowledge that the inventory of existing homes for sale is also historically low. Boomers who have been aging in place are part of the issue here and will gradually begin to “age out” of those homes, bringing some much-needed inventory to market.

With consumer confidence at an all-time low, what can industry players do to inject renewed interest in buying a home?
Dr. Deitz: The industry needs to highlight the long-term benefits of homeownership, including wealth accumulation. Builders are focused on a rebound in the market in 2024.

Hale: Even when market conditions are not ideal, it can be a good time for some households to make a move. I think focusing on the unique needs and wants of your potential sellers and buyers will help you guide them to the decision that is right for them, which will ultimately serve them and you best in the long run.

Some key audiences who might find the market a little more palatable now are those who have ample home equity or cash to use to facilitate a transaction.

High mortgage rates should not impact their calculus, and the fact that competition is lower may be something that they can benefit from.

What role will technology play in the housing space as we move forward?
Rood: I believe people will prioritize technologies with low implementation costs and rapid ROIs, versus massive system overhauls (limited bandwidth and capacity to take on the spend).

It would reason that institutions will look more for third-party solutions, where possible, versus continuing expensive internal build projects. Service providers are likely to continue ramping up technology-enabled solutions to assist mortgage companies with operating capacity, efficiencies, and adopting a more variable cost business model to focus on returns on marketing versus returns on investments.

We also believe that the customers/originators are looking for uniformity in the process from one lender to the next. Common vendor-managed portals delivering loans with process efficiencies for originators to lenders will achieve this goal in 2023. These new Universal Delivery Portals (UDPs) will allow all users to remain on their legacy systems while connecting to current and new customers with state-of-the-art technology and workflow. These new UDPs will reinvent the landscape in 2023.

Singer: The pandemic helped accelerate the rate of tech adoption in the real estate industry, but buying and selling a home remains a complex and fragmented process. Some aspects have moved online—like home search, online lending approvals, and digital closings—but we need solutions that streamline the process across the home buying and selling journey and help solve persistent pain points to make bit easier and more transparent. Technology can help us do that, and we believe this trend toward a more seamless translation will only continue.

After Zillow shuttered its iBuyer division last year, and the recent news that Redfin was winding down its RedfinNow iBuyer division, what does the future hold for the iBuyer market? Is there time for it to be resurrected or has this market met its demise?
Singer: iBuying appeals to a certain subset of homeowners looking to sell their properties, and we believe there is a place for it among the various innovative new options for homeowners looking to sell. The companies that do it well, with sustainable models, will thrive, so it is up to the market to determine who ultimately succeeds in iBuying. At Realtor.com, rather than trying to do it ourselves, we are taking an open marketplace approach and have built relationships with companies that offer myriad selling options to give homeowners options and find the right choice for their needs—including listing on the open market with an agent.

What needs to happen for buyers to grow confident in listing their homes once again, and to help rebuild the sellers’ market?
Blomquist: Time, combined with a more stable mortgage rate environment, will help convince more homeowners to list their homes for sale, and to adjust their pricing expectations when doing so. Even if mortgage rates do not decline significantly, if they remain relatively stable for a few months that will help give sellers the confidence to list. More stable mortgage rates will restore some certainty and predictability to the market so that sellers can know what to expect when they sell and also what to expect if and when they become buyers again after that sale.

Dr. Deitz: Positive inflation data, and sustainable declines in the rate of inflation so the Fed can ease, need to occur to grow confidence in the market. This may occur in late 2023 or early 2024.

Hale: Additional construction is needed to help alleviate the long-term housing shortage that the market continues to grapple with. This shortage has prevented more drastic adjustments in price, even in the face of short-term weakness in housing demand. But in the longer run, the market will work better for everyone if housing is not in such short supply.

Dr. Lautz: Homeowners are likely feeling discouraged from listing their home on the market, especially if they refinanced or purchased in the 2.5%-3.5% interest rate range. However, it is important to keep in mind sellers move because a life change takes place—a family change, a new job, or an economic shift in the household will cause sellers to move regardless of the recent increase in interest rates.

Rood: The year 2023 is likely to reflect the “Catch 22” for sellers currently—prospective sellers do not want to list because there is nothing to buy, and there is nothing to buy because nobody is listing. Sellers also struggle with the “locked-in effect” of having to give up their record-low mortgage rates to move and accept a new mortgage rate that is considerably higher (psychological and economic impediments to listing).

I do not anticipate a wave of new supply in resales or new construction in 2023 unless interest rates get back into the 5.5% range again. The lack of new listings will make sale prices stickier—less likely to drop considerably—when you consider that home inventory levels are still near record lows and trending downward (e.g. supply of existing homes for sale is only about one-fifth of the supply on the market in 2007).

Sharga: First of all, what constitutes a “sellers’ market” is high demand, low inventory, and rising prices—pretty much a perfect description of the market from mid-2020 until this year when Federal Reserve actions poured ice water on the overheated market. With the majority of homeowners now holding mortgages with sub-4% rates, we are not going to see massive numbers of homes listed for sale, since the owners would be trading in that low-rate loan for one with rates two to three points higher; they will simply wait for market conditions to improve, which will keep inventories low.

Home prices, while still higher on a year-over-year basis, have also been falling nationally for the past three months, another trend that will keep homes off the market. And demand, because of worsening affordability, has weakened over the past few months, so there is less competition among buyers to help sellers get the best price. The combination of these factors leads to a simple conclusion: any homeowner who can wait to sell will wait to sell.

What will bring more homes to the market? Mortgage rates must drop back below 6%, and wages need to continue to rise, which will spark demand. That, in turn, will help stabilize home sales prices and potentially reverse the decline, which will then signal homeowners that it is safe to list their properties. I do not expect that all to happen in 2023; more likely we see things start to improve later in the year and see the market come back in 2024.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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