The Real Estate Collapse of 2023

Increasingly, experts who cover the real estate market look for a collapse of prices, and sales, in 2023. Almost the entire reason is interest rates, which are near 7% for 30-year fixed-rate mortgages. The number may top 8% next year. This would be a two-decade high.

Mortgage rates were near 3% last year, which made homes unusually affordable. This helped fuel the housing market boom not matched since 2005. That one ended in the housing collapse of 2007/2008. That will not happen with the next collapse. Mortgage qualifications are much more stringent than they were 17 years ago. And the entire financial system will not crater as it did during the Great Recession. Foreclosure figures will be low, even though home sales and values will drop.

The logic behind a collapse in housing prices is partly that cheap mortgages created a land rush for people who wanted new homes. Many of these migrated from large and expensive real estate markets on the coasts, such as New York, San Francisco and San Jose. Many of these people moved inland to metros such as Phoenix and Boise. This rush, in turn, pushed prices in these smaller cities up quickly. Home prices in several areas rose 30% or more year over year each month. Even before the rise in mortgage rates, demand had priced these markets beyond the reach of many buyers.

The difference between the monthly payment on a $400,000 home (about the U.S. median house price) can be hundreds of dollars a month between a 3% mortgage and one at 7%. Add this to home values that already have soared, and millions of people have to shift their strategy about home purchases. Mark Zandi of Moody’s recently told Realtor.com, “The housing market is the most interest-rate-sensitive sector of the economy. It’s on the front lines of the fallout from the Fed’s efforts to bring down inflation.”

Another wall real estate buyers have to climb is the overall rate of inflation, which the consumer price index has put at over 8% recently. This erodes the overall buying power of many people as the cost of essentials, including food and travel, rises quickly. Household budgets are under siege. Purchasing power, in general, falls to pieces.

Home prices will dive next year, particularly in expensive markets. The Federal Reserve will take most of the blame. Its efforts to fight inflation through interest rate increases have driven mortgage rates that have made too many homes unaffordable.

Sponsored: Find a Qualified Financial Advisor

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

Source: Read Full Article