Is Housing Inflation Slowing Down? Trends To Look For In 2023

Key Takeaways

• Many factors contributed to the rapid rise in home and rent prices over the past few years.
• Because of the long process from building to selling homes, it takes time for housing inflation to slow.
• The outlook for 2023 is cloudy, with many factors coming into play.

Over the past few years, the trend of rising home prices has left many would-be buyers priced out of the real estate market. Some are even hoping for a housing crash to allow them to buy a home. Here is why housing inflation spiked during the past few years and why any slowing is unlikely, at least in the near term.

Rapid rise in home prices

While home prices were rising before the pandemic, this black swan event increased the speed for a variety of reasons.

First, the pandemic introduced everyone to remote work, where you could live anywhere, not just within a short distance of your office. Many people left large, expensive metropolitan areas for the suburbs and rural areas that had lower living costs.

Another factor was investors taking advantage of easy lending terms, low interest rates, and the opportunity to increase their net worth on paper. They bought properties to rent to third parties. As this trend became a popular way to earn money on the side, more people decided to try their hand at buying and renting properties for passive income.

Due to supply chain issues, fewer new homes were built during the pandemic. During this time, homes under construction were delayed further by local municipalities taking a long time to issue permits. Even as these issues have eased recently, many home builders are pausing projects due to fears of a recession and weak demand.

Commodity prices for lumber also experienced a rapid increase as mills and housing-related industries had to restart after closing during the pandemic. It took time to gear up manufacturing facilities, which meant home-building supplies were in short supply. A tariff on Canadian lumber imports to the U.S. has also made lumber more expensive. The move was intended to protect the American lumber supply chain but only served to make the final cost of a new home more expensive.

Existing homeowners were also reluctant to move due to the low interest rates and monthly payments on their existing mortgages. This restricted the supply of homes on the market, as moving didn’t make sense for many families since the rent or mortgage on destination homes would have stretched their budgets.

TryqAbout Q.ai’s Inflation Kit | Q.ai – a Forbes company

Most of this was spurred by the low interest rate environment led by the Federal Reserve, banks lending money through various debt products, and the federal government providing stimulus money during the pandemic. Individuals found themselves flush with cash, and they could easily buy properties of all types at higher prices. This was evident as many people made all-cash offers on homes and even waved inspections. In turn, sellers found it easy to sell their homes at high prices.

All these factors combined to send home prices spiking to record levels. Would-be homeowners might have thought that renting would be a better alternative. However, rent prices saw spikes as well.

Rapid increase in rental prices

Rents have also increased. With home prices higher, many lower-income people found it more challenging to afford a home. Many middle-class wage earners also were priced out of the hot housing market. Some people that could afford to buy a house decided to keep renting, waiting for home prices to drop. Gen Z is hoping for a real estate crash like the one experienced in 2008.

Also impacting rental prices were previous homeowners who sold their homes in favor of renting. They sold their homes to realize the appreciation and turned to rent for a period until housing prices cooled off before buying again. As more people were forced to or chose to rent, monthly rents increased.

Related to this was the explosion of people and businesses involved in the rental real estate market. Some investors bought homes and rented them out as long-term rentals. Others were buying homes and renting them out as short-term rentals on sites like Airbnb and VRBO. In both cases, the investor’s goals were to profit, which also impacted rent prices.

The good news is that the rental market is slowly returning to normal. Before the pandemic, rents typically increased until the fall before declining for the remainder of the year. However, during the pandemic, rents decreased in the spring of the year (as no one was moving during lockdown) as well as the winter, but rents only dropped during one month in 2021.

In 2022, the typical trend of falling rent prices during the winter months seems to have returned. We have now seen three straight months of declines, signaling the market may be acting normally. Note that this doesn’t mean rents will significantly decrease moving forward, rather that the rapid pace of monthly increase is slowing, and a normal market of increases and decreases is coming back.

Why housing inflation takes time to slow down

The Fed’s interest rate hikes caused demand in the home mortgage market to crash almost overnight, but it takes time for the overall housing market to soften. It takes weeks for a mortgage to close, which is why when you are buying a home, most lenders recommend you lock in your rate. This way, you aren’t forced to pay a higher rate if rates rise during the closing process.

Another reason it takes time for the housing market to slow is because of buyers’ and sellers’ expectations. Because of the high asking prices of homes, many sellers are reluctant to lower their prices, hoping to get the most money possible for their homes. Buyers, on the other hand, are looking for a lower price. This results in a national chess match that plays out over weeks and months.

Finally, it takes time to increase housing inventory. You need existing homeowners looking to sell, and you need home builders constructing many new homes. The process of buying vacant land, getting permits, building houses, and selling them is a lengthy one.

Combine all these issues, and you can see why the housing market doesn’t experience changes right away. All these factors enter the market at different rates of speed, but they have a significant impact when put together.

Trends to watch in the 2023 housing market

The Federal Reserve put the brakes on the housing market when it began raising the federal funds rate early in 2022. This had the immediate effect of making mortgages more costly. At the start of 2022, the average 30-year fixed mortgage rate in the U.S. stood at around 3.5% before peaking at just over 7% in November. Currently, the average 30-year fixed rate is over 5%. Going into 2023, many experts think that mortgage rates will stay between 6-7% at least through the first half of the year before falling below 6% by year end.

While high mortgage rates cool off a housing market, home prices also have a significant impact. There has been softening of demand, but home prices have not fallen nationally. There are areas within the country where prices have declined, but overall, prices are not expected to come down. Compared to 2021, prices are still up 6%. If mortgage rates fall, this alone will make the monthly payment more affordable, and prices will not have to decrease.

Other factors can also impact the housing market moving forward. Municipalities around the country are raising property taxes in line with the increased value of homes, adding another affordability issue for home buyers. These factors could put further pressure on housing prices.

Inflation has eaten into people’s income as well. With the higher prices of most goods, many are having difficulty making ends meet. When this happens, fewer people are open to adding the large monthly payment that results from buying a home.

Fears of a recession are another factor. When there is the belief that the economy will get worse, people are reluctant to make major purchases like a home or an automobile. They wonder if they will still have a job and, if they lose their job, how long it will take to find a new one.

Commodity prices have come down from their stratospheric levels, and supply chain issues are easing, which would typically mean home builders could begin adding to the supply of homes for sale, helping to stabilize prices. However, due to weak demand in the home-buying market, major home builders have slowed down or halted their building projects. Moving forward, they may resume some projects to stay in business and reduce the number of homes they intend to deliver.

Bottom Line

No one knows for sure what is going to happen to the housing market. The most likely scenario is that the price increases will slow more noticeably and, in some areas of the country, fall slightly. Interest rates will fluctuate within a narrow range for the short term before falling once the Federal Reserve achieves its goals of reducing inflation to between 2-3%.

If you are looking to buy a home and find one that meets your needs, you should not wait to buy, thinking a housing crash is coming. The chances of this are unlikely. In the future, as interest rates soften, you can refinance and lower your monthly payment, saving you money.

While many of us wait to find just the right home at a viable price, we still want to see our money grow while keeping our investments liquid, so we can make a down payment when the time comes. To that end, Q.ai takes the guesswork out of investing.

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