Here we are in 2023, with a long, volatile year behind us. In real estate, we saw a remarkably intense first half of the year with homes selling well over list price with multiple offers due to high competition from buyers, along with lower mortgage interest rates. The latter half of the year tells a different story. Those low interest rates shot up over 5, then 6 and even 7 percent. Homes suddenly were sitting on the market for several weeks before going under contract and sellers started to do price reductions, something we hadn’t seen since before the pandemic. Some sellers are reducing the list price of their home as much as some were being sold over list price just a few months before. The market changed almost overnight, though it has tapered off some toward the end of 2022, especially with mortgage interest rates leveling out in the 6% range.
With all of this drastic change in the housing market in 2022, what lies ahead for us in 2023? Let’s start at the beginning of the market shift as that will help us to better understand the variables at play. In the late Spring of 2022, inflation was continually on the rise. Generally, there is a direct relationship between inflation and mortgage interest rates. With the cost of goods and services getting more expensive due to inflation, mortgage interest rates made a marked increase. From mid-March to late April, rates went from 3% to over 5%. After a significant increase in home values for the last two years, this sharp increase in mortgage interest rates made it very difficult for many to afford a home. As rates continued to rise and the uncertainty of our economy was on everyone’s mind, buyer demand sharply decreased. The aforementioned consequences of this continued throughout the rest of the year and now into 2023. However, as inflation has eased in the last quarter of 2022, so have mortgage interest rates.
Looking forward, everything hinges on inflation and whether or not we have a recession, or are having one already. A recession is when the economy shrinks two quarters in a row, measured by a decrease in Gross Domestic Product (GDP), or the market value of all of the goods and services produced within the country. As inflation has eased in the last quarter of 2022 and appears to be moving in the right direction, albeit slowly, some forecasters predict we might not even have a recession. If inflation continues to decrease, mortgage interest rates will go down. The more mortgage rates go down, the more buyer demand will increase. And then the housing market will start to move forward again, though not likely at the pace it has in the last two years. While this sounds like it should be a smooth process moving forward, if the economy goes into a recession, things could go in a different direction. It could lead to increased unemployment which in turn could potentially cause an increase in foreclosures. This could lead to depreciation in home values and hurt homeowners’ equity, especially those that bought a home recently.
But those are the “what ifs” regarding the general variables involved. What do the experts think at the national level with regard to mortgage rates, home values and whether or not we’ll have a recession? I follow a few experts in the field so I’ll review what they think is going to happen.
Let’s start with home values. Below is a chart that shows the home price forecast for 2023 from seven national organizations (chart taken from Keeping Current Matters – Fresh, relevant content). The slight majority expect to see continued increase in home values this year, namely Realtor.com, Pulsenomics, National Association of Realtors (NAR) and the Mortgage Bankers Association forecast an increase in the range of .7% to 5.4%. Organizations like Freddie Mac, Fannie Mae and Zelman all expect to see a decrease in home values ranging from -.2% to -5.1%. The average of all seven forecasts is .4%.
David Childers with Keeping Current Matters, predicts a flatter market but there will still be appreciation. Lawrence Yun, the Chief Economist for NAR also predicts a flat market, with an overall median price appreciation of 1% (Don’t expect a drop in home prices in 2023, NAR economist says - RealTrends). While no one is expecting a significant increase, one expert believes we might see a 15-20% decline in home values on a national level. Patrick Bet-David, Chief Executive Officer of PHP Agency, in an interview with Tom Ferry and David Childers (https://youtu.be/WPA235PwLL8), believes that the housing market, among other financial markets, will see significant declines in 2023.
Whether or not we’ll see decreases or increases will, in part, depend on which direction mortgage interest rates will move, which, in turn, depends on what happens with inflation. Similar to home values, forecasters have diverging opinions as to how rates will move in 2023 (see chart below taken from Keeping Current Matters – Fresh, relevant content).
Most forecasters, including Freddie Mac, Fannie Mae and NAR predict rates will range from 6.10% to 7% throughout 2023. The Mortgage Bankers Association has a more optimistic outlook for rates, expecting them to drop to 5.2% by the 4th quarter. An even better outlook is predicted by Barry Habib with MBS Highway. He predicts that the inflation number will go lower and, as a result, mortgage interest rates will go lower, possibly below 5% (global-macro-update-transcript-barry-habib (mauldineconomics.com)). I hope this is true as it will help make homes more affordable for many and will help homeowners maintain and build their equity.
Now I want to focus on the local economy and housing market for Northern Colorado. I will reference data from the Leeds School of Business at University of Colorado Boulder (Colorado Business Economic Outlook & Forum | Leeds School of Business | University of Colorado Boulder).
Colorado’s economy is expected to have above average growth in GDP, wages and employment. We’re expected to see wage increases in all business sectors except arts/recreation. Employment growth was 4.4% in Colorado for 2022. In 2021 they projected 2.7% growth for 2022 and if it hit that mark, employment would be at prepandemic numbers. We surpassed that, which puts Colorado in a strong position. The forecast in employment growth for 2023 is 2%. Interesting note is that WalletHub rated Colorado as the 4th best state to find a job (2022’s Best & Worst States for Jobs (wallethub.com)). Economically, what does all of this mean for the state of Colorado? In my opinion, if the country goes into a recession it won’t likely have as much of an impact on us as it would on states that are less well equipped as we are.
Population growth is expected to reach 55,000 people in 2023. Growth is expected to come from net migration (number of immigrants minus the number of emigrants) of 35,000 and natural increase (birth rate minus death rate) of 20,500. To help give insight into why people move to and from Colorado, United Van Lines, a major mover, put out their 2022 United Van Lines Mover Study. The results indicated that the main reasons people left Colorado are family, job and retirement. The main reasons people moved to Colorado are job, family and lifestyle (Cost of Living: Why more people left Colorado in 2022 than moved in | FOX31 Denver (kdvr.com)). Because of this steady population growth, demand for houses will technically remain strong, albeit dormant, while mortgage interest rates are higher.
With these factors in mind, the Leeds School of Business has several predictions for the residential real estate market in Colorado.
- Home values will likely be flat with limited growth and possibly a 3-5% depreciation in the worst case scenario.
- Rental rates will likely remain constant as demand for renting properties remain strong.
- We will likely return to the typical seasonal real estate market, with a more active Spring market, though it will be nothing like what we saw in the last couple of years.
- Homes that are updated and priced correctly will likely sell quickly. Those that do not have what buyers demand, such as updated kitchens and bathrooms, will likely sit on the market longer and have to reduce their list price in order to sell it.
In summary, Colorado is in a stronger position than other states, economically. This will bode well for us when the economy improves. While home prices went dramatically higher in the last couple of years, higher mortgage interest rates ended that trend quickly. This has brought relief to buyers, though higher rates still makes purchasing a home more difficult, and even impossible, for many. On the national level, if inflation can continue to be reigned in, we’ll see mortgage interest rates further come down. This will bring buyer demand back and, paired with ongoing low inventory, will put upward pressure on home values, though not as intense as it was in recent years. Conversely, if inflation continues to be a problem and we experience a recession, buyer demand will continue to remain lower and home values will likely experience a decline, as some of the experts predict.
About the author: Sean Gilliam is a real estate agent with LoKation Real Estate in Northern Colorado. Sean can be reached at email@example.com or by phone at 970-313-6706. For additional content see Sean’s Youtube channel or to search for properties see his web page.
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