Will Prices Fall Back? And If So, How Far?

By Todd Britsch |
This article first appeared in Realogics Sotheby’s International Realty’s 2023 Forecast Report. To get your digital or print copy of this comprehensive look at the Pacific Northwest’s ever-changing residential real estate landscape click here
Todd Britsch | Senior Vice President | Level Capital, LLC

In my 21 years of analyzing the housing market and forecasting where I believe the market is headed next, one would think “yeah I’ve seen this before”. The reality is that markets never mirror history. There has yet to be a housing cycle exactly like a previous cycle and this one is no different.

There still seems to be a tremendous amount of chatter surrounding the real estate market that there will be a great collapse in 2023 and 2024 rivaling the previous housing recession. Personally, I could not disagree more with this assertion. The market is behaving very similarly to 2018 and 2019 with multiple rolling quarters of growing sales velocity, bidding wars, double-digit home appreciation, and buyer fatigue, followed up by rising interest rates. The first half of 2018 was very active followed by a six-month pause on the market causing sellers to check their asking prices for both new construction and resale. Interest rates played a key role in 2018 and even more so in 2022.

In June 2022, the Federal Reserve started the first of eight very rapid rate hikes to temper inflation. While the Fed fund rate is still below historical norms, the rise from 0.25% to 4.5% was the fastest increase since 1980. The rapid increase shook the bond markets which in turn caused mortgage rates to rise above 7% by October of 2022, hammering affordability. We had not seen mortgage rates above 5% since 2010, so it’s not shocking that the real estate market saw sales in the third and fourth quarter of 2022 drop to its lowest levels since 2011.

So, the question is, will prices fall back?
And if so, how far?

It’s a complicated question and resale will behave differently than new construction. Most existing home sellers don’t have to sell, which is why we have seen canceled and expired listings increase some 500% in recent months. In a normal month we can see between 200 and 400 listings removed from the market. The average between September and December 2022 was near 1,900 listings per month taken off the market.

Potential home sellers are aware today that they may not or cannot get what they perceive their home to be worth, thus the number of new listings hitting the market is at an annual all-time low, (with the exception of the first two quarters of 2020 which was the lockdown period due to the pandemic.) Trading an interest rate of 4% or less for 6.25% only makes sense if they can get top-dollar. At this point, nothing is forcing homeowners to sell unlike the previous housing recession, and we are not seeing the run-up in inventory due to defaults. There is effectively no distress in the market today because recent equity gains have been so significant and mortgage lending regulations won’t allow a repeat of loose credit scenarios that led us into the Great Recession. Furthermore, the cost of rents has increased to the point, in many cases, that the mortgage payment is less than renting an apartment.

On the other side, we have new construction. Builders need to build and they need to sell their homes. As a rule of thumb right now, new construction has lost all the gains builders saw in the first half of 2022. In some geographical areas a little bit more, in other areas a little bit less.

High demand driven by low mortgage rates and lockdowns, supply chain struggles, and cost of construction with inflation drove pricing during the pandemic. King County, for example, hit a median list price for single-family new construction home of $1,800,000 in the second quarter of 2022. That’s a 56% increase year over year and a 36% increase from the end of 2021. The current median list price in King County for new construction is $1,309,000 and it is unlikely it will fall much further with the median sold price currently at $1,200,000 and mortgage rates expected to stabilize. Builders still face challenges moving into 2023 with rising financing rates but labor cost and material costs are coming down roughly 10% and the construction time frame is also being reduced which should balance out the financing cost. Builders will be playing catch-up in the spring after starts hit historic lows in the third and fourth quarters of 2022. The reality is homebuilders are well behind in production levels and the Puget Sound region is undersupplied, especially for price points below $1 million where the greatest demand exists—this is one reason why in-city condominiums will make a comeback.

I am confident that the downward slide in pricing for both new and resale is over. The Puget Sound will be entering a more stable market for the foreseeable future. The closing data coming in the next 30 to 90 days should support my theory.

Here is where we stand in early first quarter of 2023. Based on the past 90 days of sales, the months of supply for new and resale combined is 1.7 months. With just a slight uptick in sales the months of supply will drop below one month again. Early data from January sales suggest this is already happening. The average number of daily residential sales for the month of December was 93 units per day. During the third week of January, that number hit 153 sales per day. To put this increase in sales velocity in perspective, the change in sale volume from December 2020 to January 2021 was 11%, December 2021 to January 2022 was 10%.

The change in sales volume from December 2022 to January 2023 is currently 61%.

The last time we saw an increase in sales from December to January near this percentage was January 2019 at 41%. Escalation clauses are back on the table from buyers if the
home is desirable, but we also have limited buyers due to interest rates. Meaning they will go after the perceived “good deal”.

Throughout 2023 the Federal Reserve will slow their rate hikes and likely pivot towards the third or fourth quarter which will settle the bond market and mortgage rates should come down into the fives. I would not be shocked if we see them drop into the high 4% range for a short period of time. Savvy buyers who realize their opportunity to secure a home at the sharpest pricing will likely be out in droves this spring, knowing that waiting may mean declining inventory levels and more competition before long. Even if mortgage interest rates remain elevated, they’ll refinance in a year or so during the U.S. presidential elections when the Fed will be more inclined to stimulate the economy.

Expect 2023 to be a good year.

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