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Housing Market Slump Forecast Continues Into Late 2023

Homebuilder sentiment continues to fall as high mortgage rates and housing prices push consumers out of the market.
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High mortgage rates and elevated housing prices remain major roadblocks for home buying, pushing builder sentiment to fall again in October, the 10th consecutive month.

The rapid slump in the housing market is likely to continue well into 2023 as the Federal Reserve continues tightening its monetary policy.

The weakened housing market is still facing building material bottlenecks while the number of prospective home buyers declined to its lowest level since 2012.

Builder confidence for the new construction of homes declined by eight points in October to 38, which is half the level it was just six months ago, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on Oct. 18. This level is the lowest since August 2012 aside from the onset of the pandemic in the spring 2020.

“This will be the first year since 2011 to see a decline for single-family starts,” said Robert Dietz, chief economist for the NAHB Chief Economist.

Residential Homes Lead JS

Rising Interest Rates Fuel Slump 

Housing issues will continue into 2023 since the Federal Reserve has indicated it plans to raise interest rates again this winter.

“Given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues" he said. 

The number of homes being sold could continue to decline even further, Dietz said.

"While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers,” he said.

The rapid increase in mortgage rates and expectations for higher ones along with rising input costs continue to weigh on the housing market, said Abbey Omodunbi, senior economist for PNC. 

"Single-family home builder sentiment has fallen for ten straight months and will likely decline further as economic conditions worsen," he said. "Single-family building permits and starts are down 20% and 23% respectively, year-to-date. Still, housing supply will likely improve in the near term."

Housing Market Will Continue to Erode

The housing market has already eroded quickly this year and the decline will continue into next year, Omodunbi said.

"While other parts of the economy have been slow to respond to the Fed’s aggressive hiking cycle, the housing market has cooled remarkably this year," he said. "With rising interest rates, elevated inflation and worsening housing affordability, the housing market slump will likely continue well into 2023."

Fewer homeowners will sell their homes and purchase another one as mortgage rates reach 7%, adding another disruption to the housing market, said Mark Fleming, chief economist at Santa Ana, California-based First American. During the second quarter, 93% of outstanding mortgages had rates below 6%. 

"Market dynamics and the broader economic outlook have changed dramatically in the last 12 months and that has strongly influenced the fundamentals that drive buyer and seller behavior and the potential for existing-home sales compared with a year ago," he said. "Higher mortgage rates also incentivize homeowners to stay put by strengthening the rate “lock-in” effect.”

Sellers will continue to go "on strike" while the Federal Reserve continues to aggressively tighten monetary policy, resulting in a domino effect, Fleming said.

"...the more potential buyers will feel the impact of reduced house-buying power, but price appreciation will further slow and potential buyers can use adjustable-rate mortgages to regain some of that lost house-buying power," he said. "While not the frenzy of 2021, the largest living generation, the Millennials, will continue to age into their prime home-buying years, creating a demographic tailwind for the housing market.”