For years, priced-out homebuyers sat on the sidelines, praying for a market reversal to bring housing costs down from the heavens.
Next year, their prayers might be answered – sort of.
Home prices and sales both are projected to drop in 2023, according to a new California Association of Realtors forecast released today.
However, prices still will remain relatively high, and for those using a mortgage, homes will be even less affordable in 2023 than this year thanks to rising interest rates.
The median price of an existing California house will drop 8.8% next year, falling to $758,600, the CAR forecast said. That’s down from this year’s projected median of $831,500 and the lowest since 2020.
Even after falling almost 9%, 2023’s median house price still would be 15% higher than in 2020, the year the pandemic hit, and up 28% from 2019.
House sales, meanwhile, are forecast to decrease 7.2% next year to 333,400 transactions. That would be the lowest number of house sales since the housing bubble burst in 2007. And this year’s projected tally of 359,200 sales would be the second lowest since then.
Slower sales are good news for home shoppers weary of bidding wars. But it’s bad news for real estate agents, escrow officers and mortgage and title insurance providers, who rely on transactions to make money.
If next year’s forecast is accurate, house sales will be 25% lower than in 2021, when 444,520 single-family homes changed hands.
“Sales and prices are predicted to temper next year,” Bay Area real estate broker Otto Catrina, CAR’s 2022 president, said in a statement. “All point to a more favorable market environment for those who were outbid or sat out during the past two years when the market was fiercely competitive.”
To be sure, the state Realtor outlook is far less gloomy than in 2009, when home prices were down 51% from the market peak.
Realtor economists foresee a “modest recession” next year caused by the Federal Reserve’s battle to curb inflation. The 2023 gross domestic product is forecast to drop 0.5% — the first annual decline since the pandemic throttled the economy in 2020.
Meanwhile, interest rates are projected to average 6.6% for a 30-year, fixed-rate mortgage next year, up from this year’s projected average of 5.2% and last year’s 3% average.
As a result, the monthly mortgage payment is projected to increase even though prices are expected to fall – unless you’re paying all cash.
And more buyers are doing just that.
More than 22% of California buyers paid in full without a mortgage when buying a home in 2022, CAR figures show, up from 18.6% last year.
“High inflationary pressures will keep mortgage rates elevated, which will reduce buying power and depress housing affordability for prospective buyers in the upcoming year,” CAR Chief Economist Jordan Levine said in a statement. “As such, housing demand and home prices will soften throughout 2023.”
A back-of-the-envelope calculation shows the typical 30-year mortgage payment for a median-priced house will average $3,875 a month next year based on CAR’s forecast. Despite falling prices, that’s up from $3,652 a month this year.
According to the Realtor forecast, just 18% of California households will be able to afford a median-priced home in 2023, down from 19% this year and 32% in 2020.
A CAR calculation based on Ventura County listings last August shows how rising mortgage rates are putting more houses out of reach of ordinary buyers.
If mortgage rates still were at 3%, 350 Ventura County listings — or 43% of homes on the market — would be affordable to buyers able to make a $3,750 monthly house payment. But at a 6% mortgage rate, the number of homes affordable to those buyers falls to 129, or just 16% of listings.
“Stubbornly high inflation and growing economic concerns will keep the average … mortgage interest rates elevated,” the Realtor forecast said.
As rates rose this year, homes started taking longer to sell, and more sellers dropped their asking prices.
Forty-three percent of California homes sold below their initial asking prices by the end of the summer, compared with just 15% last spring.
The U.S. inflation rate – the culprit behind the latest housing slowdown – is projected to slow, CAR reported, using St. Louis Federal Reserve projections. By next winter, the inflation rate is expected to slip below 6% and drop to 2.2% by the fall of 2023.
“Buyers and sellers are adapting to the new realities of the market,” said Catrina, the CAR president. “As sellers adjust their expectations, well-priced homes are still selling quickly. And for buyers, (there are) more homes for sale, less competition, and fewer homes selling above asking price.”