It’s no secret that a lot of Michigan home buyers have put their dreams on hold for the time being. in fat, since the beginning of the year, the Federal Reserve has embarked on an aggressive fight against inflation. This has seen the Fed funds rate (the Fed’s preferred interest rate setting tool) leap from nearly zero to 3.75% with an expectation of a further hike to 4.25% before the end of the year. This Forbes article chart shows the hikes that have taken place so far in 2022.
The pace and severity of the hikes is unprecedented, as the Fed moves from a historically accommodative monetary policy adopted to gird the US economy during the COVID pandemic to a restrictive policy designed to pop the inflation bubble and put the brakes on a US economy that had become overheated and frankly, irrational in certain sectors.
Nowhere was that more evident than the US housing market. Since the start of the Covid-19 pandemic the median sales price of a single-family home in the US rose from $322,600 to $454,900 as of June 30, 2022. This 40%+ increase in home prices was driven by several factors, including record low mortgage rates (driven by ultra-loose Fed monetary policy), strong demand from buyers who had stimulus cash from fiscal policy largess (CARES Act and American Rescue Plan) and what ultimately became a classic case of FOMO, as the inventory level of available homes for sale was dwarfed by buyer demand.
Stories of seller’s receiving a dozen offers mere hours after listing their home, offers that were often $20 -30 thousand dollars OVER list price, without contingencies for important things like home inspections and appraisals that supported the offer price became common. The frenzy reached a crescendo by the end of 2021.
Early in 2022, Federal Reserve rhetoric took a decidedly hawkish tone as it became apparent that inflation in the US economy and around the world was not abating, and in fact was getting worse. Almost on cue, mortgage rates began to jump and have been on a rocket ship from low 3’s to the low 7’s in less than 9 months! Would be buyers watched helplessly as their mortgage pre-approvals vanished or were curtailed by this more than doubling in interest rates.
Sellers, whose collective equity had grown a whopping 7 trillion dollars since the beginning of 2020 began to see demand collapse by the Spring of 2022. As of October, home sales have declined 9 straight months. The seasonally adjusted annualized pace of home sales in 2022 is down nearly 30% from last year. And prices? They aren’t going up anymore. In fact, most economists are predicting home prices will drop anywhere from 5-10% by the end of 2023.
So what does this mean for buyers and sellers heading into 2023? For starters, buyers are no longer facing an irrational real estate market. Higher rates have put a dent in demand and home sellers are no longer able to name their price. Prices have begun to come down and price drops are becoming common place.
These are welcome developments for buyers, and a sobering reminder to sellers that the market is no longer a “seller’s market” and is much more balanced. Buyers will benefit from lower prices and less competition. Furthermore, we’ve seen a slow drop in rates during Q4 that is expected to persist into 2023.
Currently rates have settled back into the 6’s after peaking in the low 7’s in September. Many forecasts call for rates to drift into the 5’s by the end of 2023. While that might not be a return to the halcyon days of 3% 30 year fixed rates, this still is a very accommodating rate range. Coupled with a lower entry point on home prices this bodes well for buyers looking to purchase in 2023.
