Homebuyers eyeing a housing market plunge continue to run up against bad news. Interest rates continue to climb at levels not seen in a generation — which in turn has impacted mortgage rates.
Yet that’s created a fascinating tilt towards a buyer’s market. Homebuilders expect weaker housing conditions won’t rebound until 2024, according to a National Association of Home Builders/Wells Fargo Housing Market Index report. It’s the lowest level the NAHB has seen since 2012, discounting the plunge during the 2020 pandemic.
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Meanwhile, the sales price slump in the U.S. marked its 11th consecutive month in December, according to the latest data from the National Association of Realtors (NAR). It’s the worst tailspin since mid-2012 when the subprime mortgage market collapsed.
Weighing those two phenomena — mortgage rates and home prices — 2023 could actually be the best time to jump into the housing market. Here’s why.
Prices falling in expensive cities
Home prices in 18 of the largest 50 cities in the U.S. fell between the four-week period ending Jan. 15 compared to the same period time a year before, says a new report from Redfin.
In San Francisco, prices fell 10.1% year-over-year. Other cities experiencing price drops are San Jose, Austin, Detroit and Phoenix.
According to the NAR, we may see expensive markets fall further, which if that happens sooner than later, would make it an excellent time to buy into an expensive market.
“Markets in roughly half of the country are likely to offer potential buyers discounted prices compared to last year,” noted NAR Chief Economist Lawrence Yun in a release.
It’s difficult to know for sure if this will happen. And if so, falling prices may become offset by further federal interest rate hikes expected to arrive in the coming months.
The only way to know for sure is to wait.
Meanwhile, keep in mind that — as with any investment — it’s best time to buy is usually when prices are low.
Homeowners aren't in dire straits
The onset of the pandemic could have been catastrophic for the housing market if millions of homeowners had no choice but to default on their loans.
Fortunately, mortgage forbearance programs allowed struggling borrowers to pause their payments until they could get back on their feet. And it worked: by March 2021, the share of mortgage balances 90-plus days past due sank to 0.5% — a historic low — where it has remained.
Compared to 2010, delinquencies on single-family homes hit a 30-year high of 11.36%, when the rate was just 1.83% in the third quarter of 2022.
As of June 2022, 2.7% of outstanding debt was in some stage of delinquency, amounting to $435 billion in arrears. That may sound like a lot, but it’s a decline of two percentage points from pre-pandemic numbers.
On top of that, rising home prices has translated into increased equity for homeowners.
Although home prices have started to decline, by the end of November, mortgage holders held nearly $11.5 trillion in tappable equity — with home values in the country’s largest 50 markets still up 19% to 66% compared to the start of the pandemic, according to Black Knight, a mortgage technology and data provider.
And even as the numbers reflect the reality that the real estate market may be slowing, Black Knight has said that the “market is on strong footing to weather a correction” given that the total market leverage (including both first and second liens) was just 42% of mortgaged homes’ values — the lowest number on record.
2008 had oversupply, but here we have low supply
For those who fear a repeat of the 2008 financial crisis that rocked American banks, take heart. Even the economic perils of the pandemic left many homeowners relatively unscathed.
With some owners teetering on loan default, mortgage lenders introduced programs to put payments on pause. Historic lows in mortgage balances ensued, with loans 90 days past due pegged at just 0.5%. That’s a far cry from the 11.36% rate in 2010, when Americans were struggling to make payments.
Should home prices increase in much of the U.S., homeowners will enjoy more equity, which will put them in a better financial situation, as noted in the Harvard Business Review.
Compare that to 2008, when the housing crash and oversupply killed home prices — and led at least one Detroit homeowner to sell for just $1.
“High mortgage rates approaching 7% have significantly weakened demand,” said NAHB Chairman Jerry Konter last year. “This situation is unhealthy and unsustainable.”
And it’s why 2023 might be the lowest prices you see for some time.
So does that mean moving would be the best move? Between housing prices and mortgage rates, let’s see how the economy moves first.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.