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Housing outlook for 2023: Fewest sales in 16 years, prices will suffer third-largest price drop

Estimated reading time: 6 minutes

Blame fast-rising mortgage rates for the significant slowdown

California home prices and sales will drop in 2023, as buyers and sellers are “adapting to the new realities of the market.” 

It’s basically one new reality – much-higher mortgage rates.

As the Federal Reserve battles the highest inflation rate in more than 40 years, the housing market will endure the largest punches since the Great Recession.

The California Association of Realtors forecasts sales will plummet to 333,400 homes in 2023, a 7.2% decline compared to the projection for this year – and the fewest sales since 2007, considered the start of the housing market meltdown in the state. California home sales are already on pace to tumble 19.2% this year compared to 2021, also the largest drop since 2007. 

“High inflationary pressures will keep mortgage rates elevated, which will reduce buying power and depress housing affordability for prospective buyers in the upcoming year,” says Jordan Levine, CAR chief economist and vice president. “As such, housing demand and home prices will soften throughout 2023.”

Annual home sales compared to a year ago in California (projected for 2022; forecast for 2023)

2016201720182019202020212022-p2023-f
417,700424,900402,600398,000411,900444,500359,200333,400
+2.0%+1.7%-5.2%-1.2%+3.5%+7.9%-19.2%-7.2%
Source: California Association of Realtors

LARGEST PRICE DROP SINCE THE GREAT RECESSION

California’s median home price will decline an estimated 8.8% to $758,600, the lowest price since 2020. If the forecast becomes a reality, prices will experience the largest percentage drop since 2009 – and only the third since at least 1998, according to CAR data. 

“With the market shifting as home sales and prices are predicted to temper next year, buyers and sellers are adapting to the new realities of the market,” says CAR president Otto Catrina, a Bay Area real estate broker. Catrina says.

Mortgage rates climbed to almost 7% on Oct. 13, almost double the level from a year ago – and the highest rate since April 2002, according to Freddie Mac

The higher rates have led to fewer home and mortgage shoppers. Mortgage activity was off 39% for the week compared to a year ago, and has fallen significantly during the past six months, according to the Mortgage Bankers Association. California mortgage activity was off 40% during the second quarter compared to a year ago.

Annual home prices compared to a year ago in California (projected for 2022; forecast for 2023)

2016201720182019202020212022-p2023-f
$502,300$537,900$569,500$592,400$659,400$786,700$831,500$758,600
+5.4%+7.1%+5.9%+4.0%+11.3%+19.3%+5.7%-8.8%

Source: California Association of Realtors

‘IT’S GOING TO BE BRUTAL’

Wanna-be buyers are concerned about the dramatic increase in mortgage rates that have more than doubled the average monthly payment in less than six months. 

And many homeowners, who have been blindsided by the dramatic turnaround in prices in such a short period, are avoiding selling their homes. The primary reason is why trade their current mortgage likely with a near-record-low rate for another home that comes with the highest rate in 20 years.

It’s a push and pull that has created a tug-of-war market in recent months that could last for a few years in California and nationwide, economists and housing experts warn.

“The housing market is the most interest-rate-sensitive sector of the economy,” says Mark Zandi, chief economist for Moody’s Analytics. “It’s on the front lines of the fallout from the Fed’s efforts to bring down inflation. There’s going to be a coast-to-coast downturn in the housing market. It’s going to be brutal.”

AFFORDABILITY WILL SUFFER REGARDLESS IN CALIFORNIA

Brutal but necessary, says Federal Reserve Chairman Jerome Powell, who has come under attack for the unprecedented rate hikes.

The housing market will “have to go through a correction (as) housing prices were going up at an unsustainably fast level,” says Powell, adding that home prices and rents need to become more in line with what consumers can afford. “For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again.”

That could take some time with the Catch-22 of the highest-ever mortgage rates since the last time the Los Angeles Angels of Anaheim won the World Series coupled with the second-highest median home price in the state’s history, even with the predicted 9% price reduction in 2023.

California’s affordability rate will fall to an annual record-low of 18%, meaning fewer than one of every five households can buy the median-priced home, according to CAR. A decade ago, more than half of California families could afford to buy a house.

MORE HOMES ON THE MARKET – AND MUCH LESS COMPETITION

But those able to afford a home will find little if any competition and more homes to choose from. Those factors “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,” Catrina says.

They will also likely have more time to shop and make an offer. The average home enters escrow in 19 days compared to nine days a year ago, according to CAR. And Redfin says many homes in California are hanging around for 30 days or more.

Catrina counters “as sellers adjust their expectations, well-priced homes are still selling quickly.”

Perhaps, but another wrinkle could be on the horizon and prompted by the “cool” housing market – a modest recession in early 2023, Levine says.

And that could further affect home prices, especially in the most price-sensitive markets, including Riverside and Sacramento, says Devyn Bachman, senior vice president of research at John Burns Real Estate.

“We may see pricing corrections that are similar to those that occurred during the great financial crisis in certain markets,” she says.

Sacramento was one of the nation’s hottest housing markets during the past two years. It could become one of the coldest in 2023. Adobe Stock

California’s median home price plunged 38% in 2008 and another 21% in 2009 – almost $300,000 during that period.

But unlike the Great Recession and the market meltdown, don’t expect a wave of foreclosures. Almost two of every three homeowners with a mortgage in California are considered “equity rich,” or owe less than half of the current market value of their home, says Rick Sharga, executive vice president of marketing intelligence for ATTOM Data in Irvine.

“While home price appreciation appears to be slowing down due to higher interest rates on mortgage loans” most homeowners have a hefty cushion.    

At least for now.

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