Market Updates Q3 2023: The longtime imbalance between housing supply and demand may be about to change. This is what it will take, says industry insider Russ Anderson.
The key dynamics impacting our housing markets have demonstrated little change as 2023 has progressed. Quarter after quarter, the situation has remained the same: The combination of historically low inventory and elevated buyer demand is driving a competitive buying landscape and sending new listings quickly into contract — leaving a scarcity of offerings and keeping median sale prices well above this time last year. At the same time, significantly higher mortgage rates are not only impacting buyers’ purchasing power but also influencing the decision process for potential sellers as they consider listing their homes.
To bring more sellers into the market, mortgage rates will need to come down. At the end of the third quarter, the average 30-year fixed rate was 7.31 percent, but more than 70 percent of homeowners today are enjoying rates of less than 4 percent. Listing their properties now would effectively mean trading in those rates for much higher ones on their new homes. The mortgage-rate threshold for inciting owners to act, according to research firm Zelman & Associates, is approximately 5 percent. If rates decrease to that level, sellers may feel more comfortable entering the market. Thus, a decline in mortgage rates could have the effect of raising inventory levels and finally bringing the imbalance between supply and demand back into equilibrium.
The good news? We appear to be on that very track. Fluctuations in mortgage rates traditionally align with inflation — though they lag a bit behind — according to data from the U.S. Bureau of Labor Statistics and Freddie Mac. Inflation has dropped off dramatically since its 2022 peaks, although it did inch up slightly in July and August, reaching 3.7 percent after having declined to 3 percent in June, its lowest rate since 2021. Overall, for 2023, however, inflation is down significantly from last year, and mortgage rates haven’t yet caught up to this downward trend. But they soon will, according to multiple sources including Fannie Mae, the Mortgage Bankers Association and the National Association of REALTORS.
According to Freddie Mac, mortgage rates are projected to decrease to 6.2 percent in the fourth quarter of this year and decline further next year, reaching 5.3 percent in the fourth quarter of 2024. Considering the current rate of 7.31 percent, a forecast of such a steady decrease in the coming year — and beyond — provides reason for confidence that our tight inventory market will begin to turn around. A possible drawback for our markets next year is that 2024 is an election year, which traditionally has had an adverse influence on housing: People hesitate to buy until they know who the new president is. But there are many untraditional aspects related to this election cycle, so we are optimistic there will not be a major effect.
While mortgage rates are higher now, it is important to point out that this is not a relevant metric for all consumers. According to the data firm ATTOM, 38.7 percent of American homeowners have fully paid their mortgages, so they own their homes free and clear, while another 30 percent have at least 50-percent equity in their properties. Credit Karma has also reported that one in four U.S. homeowners — and 35 percent of those in the Baby Boomer generation — say that mortgage rates have no sway in deciding whether they will sell their homes. Mortgages are simply not going to have the same effect on everyone. Real estate transactions are still occurring, but the ongoing inventory shortage is suppressing sales and constraining the housing market, compared to this time last year.
Despite the inventory challenge, there are glimmers on the horizon that sales will improve, according to our brokerage’s own data. While we can’t confirm the same trends will extend to the entire marketplace, our own numbers reveal that pending contracts in many markets are entering positive territory when compared to this same time in 2022. Since June, pending contracts have trended up each month in dollar volume, versus the same month the prior year, with August the only exception. In September, the uptick was the largest yet. We feel this trend will continue through the rest of the year, and, since contracts serve as a leading indicator for future closings, we predict significant growth in closed dollar volume during the first quarter of 2024. The last months of 2023 may also experience an increase in closed volume over the same months in 2022, signaled by the increased number of contracts currently in the pipeline.
Another reason we will likely see increases in closed volume in the coming months is that we are now in a period where we are comparing the performance of our markets to a weak timeframe last year. The second half of 2022 and the first quarter of 2023 saw noteworthy sales declines from the same periods the year prior. In all our markets, 12-month median sale prices at the end of the third quarter demonstrated growth, compared to the same time last year. These price increases, along with the above-noted pending sales data, are further evidence of a supply-and-demand dynamic tipped in the favor of sellers. Buyer demand continues to exceed the available supply of inventory in all our areas. That demand is largely emanating from several states, such as California and New York, a unique geographical factor for our markets that sets us apart from others across the nation.
For more than three years, we’ve witnessed a continuous flow of buyers relocating to North Texas, whether to find more-expansive living environs or to take advantage of the flexibility of remote working. The elevated demand means that sellers are still faced with an exceptionally long window of opportunity to list their properties and realize maximum value. No one knows for certain just how long that will last. The economic factors that traditionally serve as our benchmark for gauging the health of real estate are mixed — but generally favorable — to the continuation of buyer demand.
The bottom line? Mortgage rates are stubbornly high and the stock market has shown volatility — but inflation has begun to ease, unemployment remains low (despite a small recent uptick) and GDP is estimated to grow at an annual rate of 4.9 percent in the third quarter of 2023, after increasing by 2.1 percent in the second quarter, according to the Federal Reserve Bank of Atlanta. The Conference Board’s U.S. Consumer Confidence did dip slightly to 103.0 (1985=100) in September, from a stronger 108.7 in August, with consumers citing the cost of groceries and gasoline as particular worries, according to the Conference Board Consumer Confidence Index.
I hope you find this report informative. The expert who can translate it all — and make it work for you — is any one of our knowledgeable agents. They are ready to help, anytime, with any of your real estate needs.