After the pandemic’s housing boom, which spurred bidding wars and drove up home prices to dizzying highs, the market has shifted in 2023. Interest rates have risen, inflation has eaten away at budgets and some economists have forecasted a recession.
As many would-be homebuyers have been priced out of the market, fewer people are competing to buy. What does it all mean for Houston’s housing market in the upcoming year?
Looped In co-hosts Marissa Luck and R.A. Schuetz sit down with Greg McBride, the chief financial analyst at the personal finance site Bankrate.com, to discuss what’s happening with the housing market nationally and in Houston. (Play the podcast episode below or listen on Spotify or Apple Podcasts.)
While the housing market is already down shifting, how far the market dips will depend on where the economy moves this year as the Federal Reserve tries to keep a lid on inflation by rising interest rates. Although the Fed doesn’t set mortgage rates, its actions affect the mortgage market.
Average mortgage rates were about 6.65 percent in the first week of March, compared with 3.76 percent a year earlier, according to Freddie Mac. For a $300,000 loan, that could add about $460 to a prospective buyer’s monthly payment, before taxes, insurance and other fees.
“Those higher rates have robbed you of a third of your buying power, relative to where it was the beginning of 2022,” McBride said.
That has real consequences for homebuyers who are watching their prospective monthly mortgage payments rise. For a 30-year, fixed, rate loan for median-priced Houston home in the fourth quarter of 2022, monthly payments hit $2,350 – up from about $1,660 a year earlier, including insurance and taxes, according to Houston Association of Realtors. Rising mortgage rates and higher home prices have spurred many buyers to sit on the sidelines. Meanwhile, some sellers hesitate to list their properties because the rate on their existing mortgages may be lower than what they could get on a new loan if they traded up.
That’s why McBride pins much of the housing market’s future on whether or not the U.S. averts a recession.
“Inflation and the health of the economy are really going to be the fundamental factors this year,” McBride said. “So coming into the year, a lot of expectation and what forecasts that the economy is going to go into recession, at some point in 2023, I think in that scenario, mortgage rates are going to drop. And I think we might be surprised at how quick they drop, they could fall to 5 percent,” McBride said. By the end of the year, McBride expects mortgage rates to hover around 5.25 percent.
But so far this year, a recession isn’t imminent, which could keep interest rates elevated for longer, he added.
“If inflation stays elevated and the Fed just keeps raising rates, that’s going to keep a floor under mortgage rates,” McBride said.
Although median home prices are up nearly 13 percent in 2022, sales volume contracted by nearly 11 percent, according to Houston Association of Realtors.
Monte Bach/Staff graphic
Meanwhile, Zillow is predicting home values to slide slightly this year (by about 1.6 percent in Houston), but not enough to bring home values down to levels seen pre-pandemic. (Click here to see how home values have changed in your area.)
Houston’s average home prices peaked in May 2022 at $438,302 and have slid down to about $381,983 in January, according to Houston Association of Realtors. That is still up about 1.5 percent year-over-year and about 31 percent higher than January 2020, when average home prices were $289,952.
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Source: houstonchronicle.com