What it means for demand Mortgage rates

  • Experts predict a possible recession in 2023.
  • A downturn in the economy would hit a real estate market that has been running hot for years.
  • But there’s still a shortage of available housing, and prices aren’t widely expected to come down.

The US economy is in a strange place — and so does the housing market.

As rising interest rates do their job of dampening demand, fears come


are on the rise. Prospective buyers may be wondering what all this means for their dreams of owning a home.

In short, price growth is likely to slow as demand slows, and mortgage rates have started falling after surging earlier this year. But with a persistent shortage of homes for sale, an economic slowdown will not herald a new era of affordability in the US housing market.

A recession could hit in 2023 — but it’s likely to be mild

Despite jobs piling up, wages rising and spending booming, some Americans are having a hard time.

Inflation has climbed to a 40-year high while consumer sentiment has fallen to a decade low. Rising interest rates have also made all forms of borrowing, from car loans to installment payments, more expensive than just a few months ago.

As the economy continues to unbalance, fears of a possible recession are spreading. And while experts believe that’s unlikely in 2022, signs point to an economic downturn in 2023.

“Financial conditions have tightened significantly and the economy is slowing faster than previously expected as markets adjust to the Federal Reserve’s tightening guidelines,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a statement referring to the Fed’s interest rate hikes that began in March to cool skyrocketing demand across the economy.

HSome prices are likely to continue to rise in most markets, but at a slower pace

If a recession looms in 2023, it could mean the housing market is bracing for a slowdown after years of hot demand that’s pushing up prices — but that doesn’t mean home ownership will become more affordable for potential buyers.

“If the economy weakens or a recession hits, that would weaken demand further,” Len Kiefer, chief economist at Freddie Mac, told Insider, adding that it could lead to a slowdown in price growth.

Although property prices have indeed fallen in some markets, they are still rising in other parts of the country — but at a much slower pace. While price growth is expected to continue to slow, Kiefer said that doesn’t mean prices will fall.

“We assume that real estate price growth will weaken over the course of the summer,” said Kiefer. “However, we continue to expect house price growth to remain positive. That means homebuyer affordability will be stretched even further when combined with higher mortgage rates.”

Pandemic-era low mortgage rates are over

The mortgage deals from the pandemic era are over and home ownership is becoming more expensive.

Although mortgage rates fell slightly in May, they are much higher than in 2021.

According to Freddie Mac, the average U.S. fixed rate on a 30-year mortgage fell to 5.10% last week from a pandemic high of 5.30% — but that’s significantly higher than a pandemic low of 2.68% in the last week December 2020.

As mortgage rates put additional pressure on housing costs, average-price home buyers expect monthly mortgage payments that are more than $400 higher than a year ago.

There are still not enough homes on the market to meet demand

With interest rates generally rising and inflation putting pressure on everyday expenses, Americans will likely find it harder to afford housing — let alone a new home purchase in 2023.

“Declining home affordability is not only a problem for prospective entry-level homebuyers, but current homeowners are also less likely to swap their existing mortgages at lower rates and put their homes up for sale, both of which are likely to weigh on sales.” said Duncan.

To help balance the housing market, house prices need to fall — and that means more homes need to be built in 2023. “A cooling of the market is necessary to bring supply and demand back into balance,” said Kefer. “The rate of growth in property prices over the past two years is unsustainable over the long term.”

Even as new listings continue to hit the market, the number of homes for sale is still at an all-time low.

To address the growth in home prices and the country’s shortage of affordable housing, the Biden administration has launched an initiative that proposes using federal dollars to increase the supply of affordable housing. But there’s a catch — the plan will evolve over the next five years.

That means Americans are unlikely to see a surplus of new inventory in the housing market next year. With a potential recession looming and mortgage rates nearing a thirteen-year high, the country’s lack of housing stock will continue to hurt affordability for buyers in 2023.

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