It’s time for your quarterly housing market update! SPOILER ALERT: It’s still sort of sideways, so samesies as the last update.
I have to be honest, the predictions for the 2023 housing market are all over the place. If you are planning to sit tight for the foreseeable future, this update will be mildly interesting, a blip in your home ownership radar. If you are planning to buy or sell in 2023, buckle up and let’s go for a ride down update lane.
I have independently compiled the data here from various sources, and the thoughts and opinions expressed herein are my own.
Housing . . . Armageddon?
I understand that headlines are supposed to be eye-catching, but can we please get back to an era of responsible journalism? When I read the headlines, I start to wonder if we’re just generating self-fulfilling prophecies. Is it the chicken or the egg?
In line with my November market update, I think we are due for an adjustment to housing prices, not Armageddon, and this scenario is what we are seeing play out across the country. (That crystal ball I bought off the internet is really earning its keep.)
Money Ain’t Cheap (Anymore)
I remember in my younger years being completely mystified when someone referred to “cheap money.” What could that possibly mean? A dollar is a dollar. It’s neither expensive nor cheap.
It wasn’t until years later, I understood that this phrase referred to the cost of borrowing the money – i.e. the interest rate charged to borrow a sum of money.
One of the big hurdles in the housing market right now is the cost to borrow money. For illustration, a $200,000 loan in January 2021 might have had a monthly payment of $843 (principal & interest). The same loan in January 2023 might have a monthly payment of $1,199, a $356 per month difference. That’s $4,272 per year.
What’s different between those two payments? An interest rate of 3% vs 6%.
Money costs more now. Period. (Multiple periods included for dramatic emphasis.)
Historic Rate Baloney
You’ve probably seen posts on social media or news articles hawking a bill of goods about rates still “below the historic average.” This determination is dependent on how you crunch that data, but regardless I don’t really care because while history can inform us, you have to factor in the current state of affairs and how it diverges from the historic case study. (My seventh grade English teacher, Mrs. Hazard, would be so upset with that run-on sentence.)
Let’s visit the 80s
Yes, in October 1981, the 30-year fixed rate mortgage peaked at 18.45% and people still bought and sold houses. That’s a pretty startling fact (for those of us who didn’t live it!), but let’s dig into the another factor happening in that market.
In 1981, the median cost of a home was $68,900. Considering that’s what people might drop on a tricked out white Jeep Grand Cherokee with a black roof (oddly specific, wasn’t that?), that seems like a pretty good deal these days. Now, the median wage for a man aged 25-59 in 1981 was $47,700. So a house cost 1.44x a breadwinner’s median salary. If you had two salaries coming in, it would be even less.
And Now Back to the Future
In mid-2022, the median cost of a home was $440,300. In 2022, the median weekly earnings of a man over age 25 was $1,219. I’m going to extrapolate that into an annual salary of $63,388. A house in this scenario costs 6.95x the median salary. (I’m not hating on female workers here – I’m just trying to keep the apples away from the oranges. They don’t play nice in the sandbox.)
Do you see where I’m going with this? Uh, huh. I thought you would. The price to salary differential is drastically different in current times.
Yes, people could maybe swallow an 18+% interest rate in 1981 and make it work until they could refinance. In 2023, this rate would crush the housing market for traditional home buyers – lenders wouldn’t even be able to approve a massive chunk of the population because a simple car payment would be enough to knock their Debt-to-Income calculation into “no go” territory.
Affordability Gridlock
What we have going on in the market is what I’m called an “affordability gridlock.” Using the numbers above, the median cost of a house has increased 539%. The median salary only increased by 32%.
I’m not an economist, but it seems as though the historic run of cheap money is part of what contributed to the price inflation in the housing market. If money is cheap, buyers can afford more than they otherwise could. And where there was demand, sellers could extract higher prices from buyers amidst the competition.
Now we are sliding down the backside of this mountain. Money is no longer “cheap”, but the prices are still reflecting that historic high those cheap rates helped produce.
2023 Predictions
In my research meanderings, I came across a quote so great, I needed to pull it in word-for-word. Here’s one writer’s opinion on the 2022 housing market:
The housing market was a wild rollercoaster that ended with a big fat splat last year, with mortgage rates doubling and demand plummeting.
Aarthi Swaminathan, Fannie Mae Chief Economist Sees House Prices Falling
Sellers Stay Put
Would you change out a 3% mortgage for a 6% mortgage? Probably not unless you had to (major life change) or the cost was worth the reward. This calculus is the one homeowners everywhere are making in their heads.
With this in mind, many sellers are choosing to stay put, which is crunching the available inventory.
Stats to Consider
Let’s review some quick factoids from this January article, A Housing Market Hangover.
- In November 2022, home prices increased 2.6%, year over year.
- For the same period, the number of sales was down 35.1%, the largest drop in a decade.
- Between December 2019 and June 2022, home prices jumped 45%.
- In October 2022, cash buyers made up one-third of all home purchases.
Let’s recap, Dabs-style. Prices were still increasing as of November, but less houses were purchased. Homes prices have increased significantly in the last several years. Cash buyers, who have a strong edge over buyers using a mortgage, were snapping up one-third of the available homes.
This [BLEEP] is bleak. Yeah, I just said that.
So When is the Crash?
Answer: Probably not in the foreseeable future. Unlike the 2008 crash, buyers have a lot of equity in their home because the Wild Wild West lending practices of the early 2000s were significantly curtailed by Congress. These homeowners have skin in the game.
If a homeowner goes into foreclosure, they can sell their home to exit the mortgage and likely still walk away with some cash in their pocket. Even if there is a recession (which seems more likely as time goes on), the inventory is so strangled that there will still be ready, willing and able buyers for those homes. Put a crash out of your mind.
That being said, “experts” are predicting national prices will trend downward anywhere from four to ten percent. This is going to vary based on geography. The biggest drops are going to be in those white-hot pandemic markets. Here in Michigan, we may see prices stay flat or even increase slightly.
Dabs, Give Me Some Good News
You got it! For buyers who are still in a position to buy, you are now in a position to find a house, put in an offer . . . and win. During the height of the crazy, my buyers were averaging 1-2 misses before they got the win. Why? Because there were so many offers, they were beat out by crazy offers or terms that couldn’t be beat. (Cash is 🤴. It’s difficult to compete with a cash offer than can close in 10 days.)
You can spend an hour inside a home, instead of 15 minutes. Or maybe, attend an open house without being shoulder-to-shoulder with other buyers. You can even – GASP – go back for a second showing to see if the home lives up to your expectations. There’s room for negotiations (I live for the negotiations!); as a buyer, you could receive repair allowances, rate buy-down funding, a longer inspection period or a myriad of other benefits that were unheard of in 2021 through early 2022.
Additionally, the Michigan statistics are not quite as grim as the national data. In December 2022, home prices were down 0.57% (basically flat) and the average homes sold year over year was down 29.6%. The median days on market was 34 days, up 9 days year-over-year. While the houses are sitting a bit longer, they are still selling at a pretty decent clip.
Well folks, sorry to be your buzzkill this week, but I try to bring your brutal honesty where the situation merits it. We’ll see where we end up next quarter when the market starts to heat back up in the spring!
As always, thanks for joining me this week for our housing market update. I’m here to help with all your home ownership questions and concerns. 😉
