Updated: Feb 8
Last year, the real estate market did not look as friendly as it looks this year so far. Interest rates skyrocketed as the Federal Reserve started to increase base points on all types of financial markets from capital markets to commodity markets passing through asset markets. Thus, every market within financial markets has been affected by the raise of interest rates. The Federal Reserve made it very hard for consumers and corporations to borrow. Interest rates reached new heights last year, which attempted to discourage consumers to get a mortgage and investors to purchase mortgage-backed securities. It is highly unlikely that if a recession were to happen, it would come from the real estate market.
Source: Urban Institute
In the mid-to-late 200s, the equity in people’s homes was around $15 trillion while mortgage debt stood at $9 trillion. Though, many of the consumers who got a mortgage for their house were underwater homeowners. When the recession happened in 2008, many of these underwater homeowners defaulted on their loans. Fannie Mae and Freddie Mac intervened in the real estate market to stabilize the financial hemorrhage. They implemented a set of policies known as the First-Time Homebuyer Act, which would enable first-time homebuyers to get a tax credit that is equal to 10% of their home’s purchase price and may not exceed $15,000. The aftermath of the financial crisis of 2008 led to an upsurge in both debt and equity in the housing market, especially in the single-family housing market. It is projected that the maximum tax credit that a first-time homebuyer can get would be $18,233. Thus, the 2010s show the dramatic rise of the housing market where home equity is well above $30 trillion while mortgage debts have increased to roughly $12 trillion.
Professional forecasters have conducted many projections for 2023. Based on their projections, (1) it is expected that housing market prices will continue to rise. The median home value in the United States has risen for ten consecutive years. Housing market prices have risen 13.5% due to increasing demand and a lack of supply. (2) The American market has more than one million homes for sale, which is considered below “healthy” levels. High-interest rates will make homebuyers cautious before purchasing a new home. (3) Interest rates are expected to increase. Indeed, Jerome Powell, the Feds Chair reiterated that he would keep increasing interest rates until inflation is tamed enough. And (4) investors will prioritize rental properties. Of course, none of these projections are guaranteed but they help us understand better what is to expect for this year in the housing market.