The Federal Reserve’s decision to increase the Federal Funds Rate from nearly 0% at the start of 2022 to 4.5% in December 2022 was made to combat inflation. However, this increase in the Fed Funds Rate resulted in long-term mortgage rates more than doubling, rising from 3.25% in early 2022 to over 7.25% in October 2022.
Unfortunately, the Fed’s efforts to combat inflation have led to a near-certain economic recession in 2023, with economists predicting a “soft-cession” rather than a typical recession, which will have less of an impact on employment.
The housing market is also expected to be subdued in 2023, especially in the first half of the year, representing near-term opportunities for first-time homebuyers. As inflation eases, long-term mortgage rates will drop below 6% and continue their slow trajectory downward, dropping below 5.5% most likely by mid-year.
The low housing supply, which favors sellers, and low housing demand, which favors buyers, will continue until mortgage rates drop below 5.5%. As mortgage rates drop, demand will improve, especially in the second half of 2023, making it harder for homebuyers.
The housing market is no longer as insane as it was in 2021 and the start of 2022, with homes in California no longer selling for 20% over asking price as a common occurrence, and there being less buyer competition.
Mortgage rates dropped in December after peaking at above 7% in October and November, leading to an increase in home sales. However, despite seller incentives and lower rates, affordability challenges and high mortgage rates and prices limited buyers from entering the market. People who purchased in late 2022 or early 2023 will likely be looking to refinance towards the end of 2023.
In summary, the Federal Reserve’s efforts to combat inflation have led to an economic slowdown that has subdued housing market in 2023, making this part of the year an easier time for homebuyers. However, as inflation eases and mortgage rates drop, the housing market is expected to improve in the second half of 2023, making it harder for homebuyers.