We don’t think anybody is upset about leaving the 2023 housing market behind.
Mortgage interest rates kept climbing. The higher they went, the more buyers were priced out, especially first-timers. Meanwhile, the housing shortage didn’t improve as the higher rates resulted in more would-be sellers deciding to stay put and hold onto their low mortgage rates.
Not surprisingly, the number of existing home sales dropped in 2023 as the market contracted. Sales fell nearly 19.1% from 2022 and about 33.5% from 2021, according to Realtor.com.
2023 is on track to have the fewest existing home sales since 1995! That’s despite all of the pent-up demand from aspiring buyers eager to get into a home of their own.
So what happened in 2023 that caused all this turmoil with housing? Let’s look back on the changes that defined the year.
High mortgage rates paralyzed the market
The high mortgage rates that wreaked havoc on the housing market were a byproduct of the U.S. Federal Reserve hiking up its short-term interest rates to combat inflation. When the Fed jacked up its rates, mortgage rates generally followed, although they were volatile throughout 2023.
The year kicked off with mortgage rates in the mid-6% range, according to data from Optimal Blue. That was a promising start to the new year as rates had topped 7% in fall 2022 before coming down.
But that relief was short-lived. By early March of 2023, rates had passed 7% once again. They moved up and down throughout the year and topped out at nearly 8% at the end of October.
This was when the Federal Reserve finally became optimistic about inflation and decided to pause its aggressive rate-hiking policy. The bond markets reacted favorably to this news, and mortgage rates finally started to trickle down.
Rates dropped even more in December after it was announced that several cuts to the fed funds rate are anticipated in 2024. As of the publishing of this article, the average 30-year fixed rate is nearly 6.5% according to data from Optimal Blue.
New listings dried up
As rates continued to climb, the number of existing homes going up for sale fell dramatically.
This contributed to what many call the “lock-in effect”. Today’s homeowners have such low mortgage rates that they either won’t sell or they simply can’t sell and take on a more expensive housing payment at a higher rate.
And this isn’t just a small number of homeowners. Nearly two-thirds of all mortgages out there today have an interest rate below 4%, and nearly a quarter have a mortgage rate below 3%. Most of these homeowners will not budge and will continue to enjoy their low, fixed-rate mortgage for many years to come.
Home prices hit all-time highs once again
Many housing experts thought that 2023 was going to be the year that home prices finally ‘crashed’. They had risen so much over the past few years and mixed with higher rates to severely impact housing affordability across the country.
But even though the monstrous appreciation we saw during the COVID-19 pandemic came to an end, home prices still crept higher in 2023.
According to the most recent Realtor.com listing data, the median home price went up 2.1% year over year to $428,000 in 2023 – another new record.
This happened because buyers were still competing for a very limited supply of homes for sale. When a home in a desirable area came on the market at a relatively affordable price, buyers bid up the price in multiple-offer situations.
New home construction continued to fall behind
New construction homes were a big part of the 2023 housing market, but there still were not enough coming on the market to satisfy the demand.
When buyers couldn’t find homes existing homes to buy, they settled for smaller and more affordable homes that were being newly built. To help with affordability, a lot of builders offered to contribute to closing costs, give free upgrades, or buy down mortgage rates either temporarily or for the full term of the buyer’s new loan.
Even though there was more new construction activity, the number of housing starts dropped about 10% in 2023 compared with the previous year according to the National Association of Home Builders. Housing starts measure the number of homes that builders have begun construction on but have not yet completed.
What’s in store for 2024?
As we enter the new year, more buyers and sellers are starting to warm up to the new normal in the housing market. Looking ahead, we believe 2024 will bring some much-needed improvements to affordability and the market at large:
- Lower inflation and a recession will help mortgage rates continue to improve.
- Lower rates will combine with rising incomes to boost affordability for buyers.
- Rents will continue to increase and keep demand for homes steady.
- Inventory will rise slightly as more sellers list their homes, but high demand will keep prices steady and rising in most markets.
If you have any questions or need personalized advice, feel free to reach out to us.