Housing Market Update May 2023

For years, home sellers were in complete control of the home-buying process. With a lack of inventory and strong demand from buyers, sellers could list nearly any price and find a willing buyer. The demand was so strong that many buyers submitted offers over the list price, waived inspections, and more just to land a home — any home. In some markets, you needed cash on hand to make the purchase, as having a financing contingency clause pushed you down the list.

But times are changing, with the Federal Reserve raising interest rates for the tenth consecutive time this month. Here is where the housing market stands today and its outlook for the coming months.

Key Takeaways

• Mortgage rates have been jumping up and down in a kind of rollercoaster recently.
• 30-year fixed-rate mortgages are still sitting a bit below 7%, and experts are hopeful they’ll end the year beneath 6%.
• Both homebuyers and sellers are increasingly optimistic about the housing market, as demand slowly increases again with more people entering the market.

Where Do Mortgage Rates Currently Stand?

Early in 2022, home buyers could get a mortgage with around 3.5% interest. But with the Federal Reserve aggressively raising interest rates, the rate on a 30-year loan increased to 7.08% by the fall of 2022. On a $250,000 loan, this increased the monthly payment by over $550, from $1,122 to $1,676.

Some experts posited that mortgage rates would stay around the 7% level for some time as the 10-year Treasury yield (which offers a rough guide to mortgage rates) had stabilized. Others argued that because the Federal Reserve had not indicated any plans to slow its rate hikes until inflation decreased to its target range (2-3% annually), mortgage rates could hit 8% or higher in 2023.

Now that we’re in May of 2023, it doesn’t appear that rates will increase to those heights after all. Mortgage rates dropped for five consecutive weeks between March and April, only to rise again for two weeks and then dip again. In May, rates increased slightly, with the Fed announcing another 25 basis point increase to the fed funds rate.

According to Freddie Mac, the U.S. average for 30-year fixed-rate mortgages on May 18 was 6.39%, up from 6.35% the week before. 30-year fixed-rate mortgages are the most common type of mortgage, as they come with smaller monthly payments but larger interest rates.

The average rate for 15-year fixed-rate mortgages on May 18 was 5.75% per Freddie Mac.

While this seems high to new home buyers, in the 1990s, mortgage interest rates averaged 7% for most of the decade, even averaging 9% in the mid-1990s. In the 1980s, you were lucky to find an interest rate for your home under 9%. In the early 1980s, mortgage rates were 13% or higher, peaking at more than 18% in 1981.

Are Home Sales Still at Record Low Levels?

You’ve likely heard pessimistic news about the housing market this past year. Not only has the cost of buying a house been increasing thanks to higher interest rates, but inflation is also making owning a home more expensive. It comes as no surprise then that home sales have been slow.

Add in fear of a recession, and fewer consumers are willing to commit to a major, long-term purchase such as a house. Consumers need to feel confident they will have a job in order to buy a home. Many companies are announcing hiring freezes and potential layoffs, which only adds to the uneasiness of purchasing a home.

In July 2022, new home sales fell to levels not seen since early 2016. In July, 511,000 new homes sold, a decline of 12.65% month over month and 27.82% year over year.

Existing home sales for August were down 0.4% compared to July and 19.9% compared to a year ago. This continued the downward trend that started at the beginning of 2022.

This year, in March 2023, 683,000 new houses were sold, a 9.6% increase month-over-month, but a 3.4% decrease year-over-year. Still, new home sales are steadily increasing, a positive sign the market may be headed in a better direction.

New home purchases were particularly high in 2020, reaching over a million units sold per month, as more people were spending time at and investing in their homes during the lockdown.

Are Home Prices Cooling Off?

One would think that with higher buying costs, home prices would fall. However, this is not entirely the case. Existing home sales saw a reduction in median selling price late last year, down from a peak of $413,800 in June 2022 to $389,500 in August 2022. However, if you looked at the year-over-year change in median selling price during that period, it was still 7.7% higher compared to the same period the year before.

Median prices continued to drop until January of 2023, bottoming out at $361,200. After that, prices increased for existing homes, most recently hitting $388,800 in April 2023. This suggests demand in the housing market is slowly starting to increase again.

New home sale median prices have been much rockier. The median price in July last year was $478,200, a 10.5% increase compared to June. Comparing that data to the previous year, prices were about 8% higher than the previous year. The increase was partially due to higher construction costs the home builder passes to the buyer.

Prices for new homes have shot up and down in subsequent new home sales data. Drops in price were partially caused by some home builders selling their inventory of homes to investors rather than buyers, resulting in as much as a 20% discount. The logic behind selling homes to investors at a discount is that construction companies get the inventory off their books with a potential recession looming.

The median price for new home sales in January 2023 was $428,500. It steadily increased to $449,800 in March 2023.

Housing Market Outlook Moving Forward

For buyers hoping that higher interest rates will cool demand enough to have prices fall, the odds are not in their favor. Even with interest rates continuing to increase this year, home prices have also increased. The only time home prices declined meaningfully was during the Great Recession. At that time, the Federal Reserve was cutting interest rates, not raising them.

Therefore, something other than rising interest rates has to occur to significantly drop home prices. This is not to say that prices couldn’t fall from current levels. They most certainly could if more potential buyers are pushed out of the market, especially if the Fed raises rates again in June. But most experts think rates will remain at their current levels for now.

If the market stabilizes and home buyers get used to the current mortgage rates, it’s possible demand will continue to increase the prices will not decline.

At the end of 2022, many experts believed weakness in home sales would continue as interest rates climbed thanks to the Federal Reserve. Small price decreases were also expected. Indeed, we saw drops in new home purchases earlier this year, but that trend is already starting to reverse. Similarly, the drops in prices we saw earlier this year have started to reverse course.

If a recession is called or inflation doesn’t meaningfully decline, you can expect the Fed to increase interest rates again, triggering more companies to announce layoffs and further tempering demand.

What Affects Mortgage Rates?

The Federal Reserve’s actions, such as raising the federal funds rate, can influence fixed rate mortgage rates, though indirectly. The federal funds rate is the interest rate at which banks and other depository institutions lend money to each other overnight.

An increase in the federal funds rate impacts short-term borrowing rates first, but it can also impact long-term borrowing rates. Fixed-rate mortgages are tied to the 10-year Treasury rate, so when that increases, the rate for fixed-rate mortgages also increases.

Supply and demand can also impact mortgage rates. Lending institutions will typically charge higher interest rates when demand is higher and decrease rates when demand is slow.

The Bottom Line

The housing market is a mixed bag currently. Rising interest rates and increased prices have made buying a home unaffordable for many people. Sales of both new and existing homes were falling as a result but have begun to increase again.

Prices also drifted down slowly but have started to increase again. The odds are low that we will see a significant pullback in home prices as we did in 2008. Potential buyers need to reassess their wish list when it comes to a new home, start saving more for a down payment, and make sure their credit is superb so they can qualify for the lowest interest rate possible.

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