Mortgage Rate Locks to Remain a Challenge

According to a forecast update by Realtor.com, mortgage rate lock-ins will be a major challenge in the housing market for the remainder of 2023. While prices posted a marginal improvement, higher rates are hurting affordability, and many of those who already own a home are being impacted by the lock-in effect and are disincentivized to list their homes for fear of taking out a new mortgage at a higher rate. 

As a result, total home sales are projected to be down 15.8% to 4.2 million units, the lowest point since 2012 because of smaller-than-expected mortgage rate lock-ins. They are also predicting that inventory levels to slip 5% for the year, result, the expectation now is for inventory levels to slip 5% for the year, and not the growth projected in the initial forecast. Home price growth is also now expected to decline (instead of increasing) by around 0.6% by year-end. 

On the rental side of the market, prices are expected to drop by less than 1% as unusually strong multi-family construction is providing more for-rent units. In addition, the challenging housing market will keep many people renting. Despite the forecasted pullback, rent is still $350 more on average than it was compared to pre-pandemic levels. 

"High inflation and the Fed's actions to curb it have had a significant impact on the housing market this year. And while inflation has begun to ease, the sustained spike in mortgage rates was enough to stifle the housing market after several years of low rates and strong activity," said Realtor.com Chief Economist Danielle Hale. "The housing market has really seen a double whammy in 2023, with a retrenchment in the number of homes for sale coupled with still-high prices and mortgage rates that have kept both first-time and repeat buyers on the sidelines." 

Also, affordability is improving but still has a long way to go. Persistent underbuilding relative to population growth over the last decade has accelerated the problem which is compounded by low affordability. As a result, Realtor.com now expects a modest decline in home prices of 0.6% for the year. The expectation is that mortgage rates will also be slightly lower than originally anticipated, but not low enough to bring down buying costs until the end of the year. As inflation is expected to cool gradually, we expect that mortgage rates will start to do the same beginning mid-year and nearing 6% by the end of the year. 

For the year as a whole, the cost of a mortgage is expected to be up 10.5% compared to 2022. 

"The vast majority of homeowners locked in low rates during the pandemic and aren't particularly excited to give them up in order to buy a new home, unless they really need to move for personal reasons," said Hale. 

Despite the Fed's tightening, the economy and labor markets have shown resilience. And while paychecks haven't kept pace with inflation, Americans have dipped into pandemic savings and continued to spend money. While this is boosting the current economy, it could have an impact in the future if consumers burn through savings and need to rely on high-interest debt.