- Inflation and mortgage rate hikes made it even more expensive to build or purchase homes in 2022.
- This led to a downturn in the US housing market as housing activity dramatically faded.
- But, as inflation slows and interest rates fall, an economist says that the US housing market may get back on track in 2023.
The home buying frenzy that took place throughout much of the pandemic drove the nation’s home prices to historic highs, further escalating the country’s ongoing housing shortage and affordability crisis.
But as inflation eases, bolstering expectations that the Federal Reserve will ease its monetary policy, there is hope that normalcy may finally return to the broader US housing market in 2023.
Robert Dietz, the chief economist and senior vice president of the National Association of Homebuilders, predicted that lower interest rates will encourage builders to construct more single-family homes this year — which should ultimately increase buyer demand.
“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” Dietz said in January’s Housing Market Index. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability.”
In other words, homebuilder optimism is improving. According to the index, which is a leading indicator of the trajectory of US housing construction, developer confidence in the market for newly built single-family homes rose four points to 35 in January — signaling that homebuilders now have a sunnier outlook on the market.
However, 2022 was a rough year for homebuilders. Higher mortgage rates which came as a result of the Fed’s aggressive battle against steep inflation effectively put an end to the homebuying boom of 2020 and 2021. With fewer buyers participating in the market, a dramatic downturn in purchase activity led to a slowdown in home construction that kept home prices elevated and housing generally unaffordable. But as more optimistic economic data points to lower interest rates, there is a chance that the US housing market may get back on track this year.
Dietz told Insider that a boost in single-family home construction will entice the nation’s millennial buyers — many of whom have been priced out of the market due to steep mortgage rates and unobtainably-high home prices — to purchase more houses, which would help breathe new life into the real estate market.
“Demographics are in favor of the industry right now given particularly the size of the millennial population — the fact that they are in their late thirties, some are in their early forties and they are looking for single family homes,” he said.
There are other experts who echo Dietz’s sentiment. Sam Khater, the chief economist at Freddie Mac, also expects lower inflation to entice more Americans to return to the housing market — especially millennials.
“While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023,” Khater said in a January mortgage report.
“Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of millennial renters will provide support to the purchase market,” he added.
Indeed, lower mortgage rates are already reviving interest from potential home buyers. In the past week, the average rate on a 30-year fixed-rate mortgage fell to 6.33% — still higher than the average rate from the previous 10 years, but down from the 7% levels seen in November — Freddie Mac indicated in the latest primary mortgage market survey. Additionally, during the past week mortgage applications increased 1.2% from the previous week, the Mortgage Bankers Association indicated in its most recent mortgage applications survey.