What’s Ahead For Housing In 2023: Single-Family Slowdown And Stop

Back in January 2020 I indulged with a prediction not just about 2020, but for the entire decade. Somehow, I missed the global pandemic and shutdown that was to happen just weeks later. So, it’s with some trepidation that I jump in again with thoughts about the year ahead with the help of a Wall Street Journal article reviewing data from the third quarter of 2022. Simply put, the housing market has already started slowdown and will grind to a halt in the first half of 2023. What comes next will depend on what cash buyers do with their money and whether governments make smart decisions or make things worse.

The Wall Street Journal’s (the Journal) story has a headline about large investor behavior in the housing market, but it ends up covering key data points relevant to forming a picture of the housing economy, especially single-family ownership and rentals. Ownership has become something of an obsession among some advocates and especially the Port of Cincinnati which has opened a campaign against what it calls “institutional investors” or “corporate investors.”

I’ve pointed out that it is a bizarre effort, trying to stop investment in rental housing by buying housing using money from bond sales to investors. The Journal story points out that, “Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.” Perhaps this will cool the regulatory fervor around the issue as well.

But the data indicate that overall, there has been a “decline in overall home sales, which have slumped with mortgage rates rising fast.” Acquisition of single-family homes by investors is often for the purpose of rehabilitating them and then turning them into rental housing. The Journal story finds that, Rent growth has also begun to slow. Rents for single-family homes rose 10.1% year over year in September, down from 13.9% in April, according to housing data firm CoreLogicCLGX
.” This is still “stronger than in the apartment market.” The story posits that the rental market for single-family homes has held up because renters of that typology have more money. This isn’t necessarily the case. Often, smaller investors acquire homes in the same way as larger ones, and frequently these serve larger families with less money.

But it is also true that these housing providers “face headwinds from rising property tax assessments that have come alongside enormous increases in home-price appreciation.” Last year’s buying frenzy pushed up asset value, putting pressure on owners not just with higher assessments, but to sell to owner occupiers, people that wanted to buy not rent.

All this is going on at a time when, as in Cincinnati, “large rental landlords are coming under greater scrutiny from federal and local governments.” I’ve already addressed ownership issues elsewhere, but here’s where all this background helps form the basis of my guesses about what’s ahead this year. As buyers find they can’t afford to buy because of high interest rates, and sellers can’t find buyers who can pay enough, there are going to be many distressed owners, especially if a recession kicks in and people begin to lose jobs.

As in 2008 and 2009, people with cash are going to find themselves in a position to relieve this problem by buying lots of land and housing, and even projects that are under construction or in financing today. The Journal story corroborates this for larger investors that it suggests are “readying large funds to snap up homes. J.P. Morgan’s asset-management business said this month it had formed a joint venture with rental landlord Haven Realty Capital to purchase and develop $1 billion in houses.” This would make it, “difficult for traditional buyers to take advantage.” You can say that again!

As cheap money dries up, and people lose jobs, many – including developers and builders – will be desperate to bail out. I’ve pointed out elsewhere, the housing market will fail to produce much housing in 2023; it will simply be too risky to start any projects in an environment being described in the Journal story. As production grinds to a halt, and those with cash buy up land, housing, and projects, cities especially will be poised for a huge price increase when demand returns either later in the year or in 2024.

Local governments are likely to do two things. First, as in Cincinnati, they will be tempted to punish investors or others who are buying properties with cash. This won’t help but will make the future darker. Chasing away investors will simply mean foreclosures and bankruptcies for over extended businesses and owners, further harming supply. Banks won’t have much luck moving properties either. The second thing some cities will do is nothing. While this won’t make the future situation worse, it will simply pave the way for panic later when prices rise because supply is strained.

What cities can and should do now is suspend all regulation that is not relevant to health and safety, expedite permitting in dramatic fashion, and use whatever resources it has to invest in completing distressed projects. Local governments could also buy up land at a bargain and then pivot later, turning the land over to Community Land Trust when the market returns.

Cities that have some insight and allow themselves flexibility will win the future recovery, enabling themselves to point to affordability as a key to attract new jobs. Those that do nothing or insist on attacking investors or imposing more rules, will find themselves, predictably, with inflation in the housing market. This won’t hurt investors who will make money, but it will harm people struggling to make ends meet and they will see their fortunes lag as others rise.