Housing Market Predictions Heading into 2023

By Shane Barber

November 10, 2022

Housing Market Predictions Heading into 2023

Key Points – Housing Market Predictions Heading into 2023

  • Average Interest Rate on 30-Year Mortgage Surpasses 7%
  • Big Declines in Home Affordability and Purchasing Power
  • The Impact of Current Housing Market Conditions and Housing Market Predictions on Real Estate Agents and Homebuilders
  • Housing Market Predictions That Remind Us of the Great Recession
  • 5 Minutes to Read

The Latest on the Housing Market

If you’ve read any of my articles in the last year, you know that I’ve been warning about the trouble brewing in the housing market for quite some time. Today, I want to take some time to give you an update on the latest developments and some housing market predictions heading into 2023 and beyond.

The Federal Reserve has raised the Fed funds rate aggressively in 2022. The Fed funds rate was 0.25% in January and now sets at 4%. Those rate increases are taking a heavy toll on the mortgage industry and the housing market. Last month, the average interest rate on a 30-year mortgage hit 7.08%.

Housing Market Predictions

FIGURE 1 – Fed Funds Rate and 30-Year Mortgage Rate – YCharts

It’s no secret that higher interest rates make higher monthly mortgage payments. As I noted in my last article, the mortgage payment on a median priced home has gone from $1,400 a month just three years ago to over $2,500 a month today. That has absolutely destroyed the ability for a lot of people to afford a mortgage.

The Sharp Fall of Home Affordability

Figure 2, below, shows that home affordability, up until this year, was at 40-year highs due to the low interest rate environment we’ve been in since the financial crisis. It also shows how far affordability has fallen in just 10 months. We’re now all the way down to affordability levels last seen in 2004 and 2005, prior to the financial crisis.

Housing Market Predictions

FIGURE 2 – Average Affordability vs. Average 30-Year Mortgage Since 1981 – YCharts

Falling affordability is affecting the mortgage industry, as fewer and fewer people are able or willing to buy a home in this environment. October saw the largest drop in pending home sales in at least eight years, falling by 35.2%, surpassing the drop in 2020.

Housing Market Predictions

FIGURE 3 – Largest Drop in Pending Sales in at Least Eight Years – Redfin

And a Huge Drop in Purchasing Power

Figure 4, below, also does a great job of illustrating the decline in purchasing power that comes with higher mortgage rates. The example is a buyer who can afford a $2,500 per month mortgage payment and the red line shows how much home they could have gotten at the various mortgage interest rates illustrated by the blue line. That buyer could have purchased a home worth $533,955 in January 2021. Today, that same buyer can only afford a home worth $378,825. That is a $155,130 or 29% drop in purchasing power in less than 24 months.

FIGURE 4 – 29% Drop in Purchasing Power Since January 2021 – Redfin

Widespread Layoffs at Wells Fargo, JPMorgan Chase; Rocket Mortgage Offers Buyouts

The effect of all this is beginning to have real consequences for thousands of people in the mortgage industry. CNBC reported last week that Wells Fargo is preparing for layoffs, as their loan volume collapses. Wells Fargo had about 18,000 loans in its retail origination pipeline at the beginning of the fourth quarter this year, which represents a 90% drop from the same time last year. This means that the number of loan officers at the bank is predicted to drop under 2,000. They had more than 4,000 loan officers at the beginning of 2022.

Wells Fargo already shrunk their total workforce by 14,000 people, or 6%, in the third quarter. And Wells Fargo isn’t alone in this struggle. JPMorgan Chase has also cut its mortgage staff levels to adjust to the dramatically lower loan volumes.

Those two banks aren’t even at the top of the food chain when it comes to home loans. The largest home loan lender in the U.S. by a wide margin is Rocket Mortgage. In 2021, Rocket Mortgage originated 1,237,033 mortgages. For comparison, Wells Fargo and JP Morgan initiated 650,163 mortgages COMBINED.

Rocket Mortgage has offered 8% of its workforce a buyout package to cut staff without having to resort to layoffs. In the first half of 2022, their earnings were down by two thirds. Their stock is down by 53.5% year to date, and down 72% from its high in December 2020. The company employs roughly 24,000 people.

The Effect on Real Estate Agents and Homebuilders

And what about the real estate agents? There are roughly 3 million active agents in the market today, and 1,547,699 of them are realtors. During the last housing crisis in 2007 and 2008, 140,000 realtors left the business in a single year. By 2012, there were less than 1 million remaining. If the same thing were to happen this time, we’re talking about 500,000 to 1 million people that could be out of a job in a single industry. As the housing market continues to get tighter, this will play out. We just don’t know to what extent.

We can’t forget about the homebuilders either. I watched a lot of people in the homebuilding industry lose everything in the last housing crisis. And I have a sick feeling that is going to happen again. Builders who have too much speculative inventory built to satisfy the demand of the last two years, which has subsequently evaporated, are now offering incentives and discounts to get rid of these homes before the bottom falls completely out of the market.

If they can’t get rid of the inventory and can’t service the debt on the construction loans, they’ll have only two options. They can either rent the properties or default on the debt, leaving the banks holding properties that they likely lent more on to build than they’re currently worth. In that situation, the builder gets financially devastated, the bank loses money, and jobs get destroyed. It’s a vicious cycle that feeds on itself.

Housing Market Predictions Highlight a Sad Reality

With the Fed fully committed to further rate hikes, I have no option but to believe this problem is going to continue to get worse. Further Fed rate hikes will feed the vicious cycle. And once it starts, it’s hard to get back under control. Those in the areas of the country who saw the largest gains in home values over the last three years will also see the steepest declines in home values over the next couple of years. Some recent home buyers may find themselves upside down in their homes as they did in 2007 and 2008, especially if they took out a loan with no down payment required.

There will be foreclosures, as refinancing is out of the picture due to the high cost of borrowing. It’s a sad reality, but some people are going to lose their livelihoods and possibly their homes, again, because the Fed is going to make sure it happens. It’s their goal, as sick as that sounds. I only wish I were wrong.

No Matter How These Housing Market Predictions Turn Out, A Financial Plan Is Critical

The good news is that this too shall pass. Eventually, we’ll get to a point of equilibrium where the Fed feels it’s safe to keep rates at whatever level they get to. At that point, things will begin to get better. In the meantime, don’t forget that comprehensive financial planning is critical to getting you to and through retirement with the highest probability of success.

We’re giving you the opportunity to build your financial plan from the comfort of your own home with our industry-leading financial planning tool. It’s the same tool that our CFP® Professionals use with our clients. You can access it at no cost or obligation by clicking the “Start Planning” button below.


The Combo of Patience and a Plan

We understand that no one wants to plan for a housing crisis or a recession, but everyone needs to. We do it every day. We’ve already stress tested our clients’ plans against the possibility of both. If you’re not a client and you want to know if you’re on track, please reach out to us so we can help see you through this. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. We can visit with you in person, virtually, or by phone—whatever is easiest for you. We can even screen share with you while using our financial planning tool and answer whatever questions that you may have.

If you have questions about these housing market predictions and conditions, you’re not alone. Just know that patience and a plan is the combo that you need to have as you’re looking for answers that will work best for your unique financial situation. We’d be glad to help you in looking for those answers.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.