Plenty will change about the market: Interest rates will even out and housing prices will decrease, but at a slower rate. Inventory will remain limited as Baby Boomers stay in their homes while millennials look to enter the housing market. That’s all according to experts who believe that, while the market won’t crash, it will experience a course correction in 2023. In much of 2020 and 2021, demand for homes was high and supply was low. Interest rates were at historic lows. Put together, these factors created a hyper-competitive sellers’ market, with buyers swarming to new listings, making cash offers, and hurrying to outbid each other. Now, prices are still high but stabilizing, interest rates are climbing quickly, and competition is lessening. The National Association of Realtors reported that home sales dipped in July and August, showing a decrease in demand that many attribute to rising mortgage interest rates. But is all that enough to lead to a crash? While these factors may have some people wondering if this means we’re headed for another housing crisis, like the one we saw in 2008, the answer is no—at least not yet! “While it may differ by local markets, a broad market crash is unlikely,” says Rob Cook, vice president of marketing at Discover Home Loans. Some experts expect demand to pick up again soon, particularly after the enormous rent increases many people saw in 2022. “By spring, people will not want to continue to pay this rent and there will be more certainty in the market, and we’ll see a big boom in [home] sales,” says Suzanne Miller, a real estate and housing expert in New York City. Still, an increase in demand may not be matched by an increase in supply. “You’re going to see the amount of trade-up buyers cut drastically for the foreseeable future,” says Ralph Reahard, owner of Real Property Management Richmond Metro. Trade-up buyers are current homeowners looking to purchase a bigger or better property. When these homeowners move on to their second (or even third or more) property, they free up smaller and often more affordable homes for first-time buyers. Fewer active trade-up buyers may mean that there are fewer entry-level homes on the market, which means fewer options for new buyers. As with most things, though, there’s more at play than just current conditions. In order to understand the range of predictions for a possible crash in the near future, it’s important to look back at the past couple of years—particularly in relation to the pandemic.
Looking Back
Before the pandemic, the housing market was humming along just fine. “People were buying and things were pretty much on fire,” Miller says. When the pandemic and associated lockdowns hit, people felt cooped up and realized they wanted more space. “With remote work, people’s homes became much more important, and they wanted bigger spaces,” Miller says. Many city dwellers went to the suburbs for larger homes and, eventually, others moved into their former spaces, taking advantage of suddenly lower rents after many properties sat on the rental market for weeks or even months. “As soon as the pandemic lifted, people went back to the urban areas,” Miller says. “They wanted to get back into the action, and they got lonely and they wanted to be in larger cities.” The result in New York City and other expensive areas is that today the market is suddenly super competitive, and interest rates and prices are high. But similar trends are happening in other parts of the country, too, where inventory was low and demand was high, which led to the high home prices we see in those areas now. This split between in-demand areas where prices are still high and areas where prices are already falling further implies that a broad crash likely won’t happen.
So, Will the Market Crash?
Probably not. Again, think correction, not crash. Reahard believes rising interest rates will slow or prevent a market crash by keeping demand among current homeowners low. With rising interest rates, he says, current homeowners who may want more space aren’t keen to sell just yet. “You may be going up $100,000 in home value, but your mortgage payments could double if you’re trading in an interest rate that you locked in pre-Covid, around 3.5 percent, [for one that’s] 6.5 percent,” he says. “People are looking at that and saying, ‘I would like more space, but I don’t want to give up this rate.’ That’s going to curtail demand, and we’ve already seen a softening of prices, and I think that’s going to continue.” The average home price has increased dramatically over the last three years, but Miller believes that those prices are about to drop back down—though they won’t plummet. “I definitely think that the market is going to level off, and it’s already gone up so much,” she says. “It’s gone up by 30 to 40%. So if we have a correction of 20%, we’re still up 20%.” If homes are sitting on the market for longer periods these days, that’s not necessarily a sign of a crash: It could simply be a matter of pricing. “Homes are only sitting on the market because sellers are not willing to negotiate,” Miller says. “Anytime a seller is pricing things realistically, it sells.” Even with high interest rates, there are still cash buyers and international buyers who are willing to pay top dollar and who don’t have to worry about changes in those rates, Miller says. “If you look at statistics over the last 50 years, according to Freddie Mac the average interest rate was 7 percent, and the market as I remember it in the late ’80s was 18 percent,” Miller says. “So although it’s sticker shock from last year, I don’t think it’s going to deter the market too badly. There’s going to be a correction; I don’t think there’s going to be a crash.” Miller anticipates those corrections will come by the end of the year, but believes the market will pick back up in the spring. Home sales typically slow in the winter months, so some slowdown is to be expected anyway.
What’s Next?
Regardless of whether the market crashes, there are definitely changes coming in the next year. Chris Masiello, CEO of Better Homes and Gardens Real Estate The Masiello Group, believes lower adjustable rate mortgages in the range of 3.75 to 5 percent will bring buyers back to the market. Adjustable rate mortgages (ARMs) change with the market, unlike fixed rate mortgages. But usually, it’s cheaper to get in on an ARM than on a fixed-rate—at least to start. Many believe fixed-rate mortgage interest rates will also level out. “Most economists are predicting that rates will level off and may decline slightly next year,” Cook says. “That said, this year has taught us all that the accuracy of any prediction on rates is only good until the next inflation report. The Fed has been raising interest rates in the expectation that those increases would curb inflation, and while it has had a moderating influence to date, it remains to be seen whether inflation is fully controlled.” If you’re looking to buy, you can shop interest rates. Cook recommends using a calculator like Discover’s Affordability Calculator to see how much house you can afford at various rates. And if you want to balance the additional long-term cost of a higher mortgage rate, there are ways to offset it. “I would be prepared to make a larger down payment. That’s one way to offset the weight of a higher interest rate—by bringing more cash to the table,” Reahard says. Whatever you do, don’t panic: Lower demand, longer time on the market, and higher interest rates aren’t worst-scenario conditions. “When people stop selling and buying and trading up and are just kind of hunkering down with the mortgage rates they’ve got until the market’s less volatile—I don’t see much of an issue there,” Reahard says.
