2023: THE GOOD, THE BAD AND THE UGLY

According to Dr. Ted Jones, Chief Economist and Senior Vice President with Stewart Title, 2023 will be the year of the “good, bad and the ugly.” Dr. Jones spoke at this year’s KCHBA Economic Forecast Breakfast. Also speaking at the breakfast was Dr. Chris Kuehl, Chief Economist with Armada Corporate Intelligence.

A Look Back at 2022

“The first indicator of a softening, down-turning real estate market is a decline in sales as prices rise strongly,” stated Jones. “Don’t ever look at price,” Jones warned. “If you want to know where the housing market is going, look at number of homes sold.” National home sales rates have fallen over the past 12 months: Year-to-date (YTD) is -14.3% and trailing 12-month (TTM) is -15.2%. On a local level, Kansas City is seeing -12.3% TTM and December 2022 sales year-over-year (YOY) were down -36.3%, almost on par with the national November 2022 statistic of -35.2%.

The market is falling out of favor for first time homebuyers. In November 2022, the percent of first-time homebuyers fell to a record low of 26% of all transactions. Jones acknowledged this is down from 34% in November 2021. For comparison, a record 50% first-time homebuyers was recorded in 2010. According to data collected by Redfin, 24% of first-time homebuyers in 2021 sourced their down payment from stimulus money. Personal savings are now currently down significantly compared to 2020 and 2021, impacting consumer buying power.

New Home Sales in the New Year

“According to Fannie Mae, [2023] compared to [2022], we’re going to sell 21.7% fewer homes,” said Jones. “Since 2002, for every new home sold, 8.9 existing homes were sold. If you want to know where the market is going, watch existing home sales… If Fannie Mae is correct, this year will bring the fewest number of homes sold since 1995.” Jones forecasts total new home sales will be down 10-12% in 2023 compared to 2022.

According to Jones, as of December 2022, “There are now 470,000 unsold new homes under all-states of construction.” This is up 21% YOY and the largest inventory seen since March 2008.

Employment and the Housing Workforce

The national unemployment rate currently stands at the lowest rate in recent years at 3.5%. According to Dr. Robert Dietz, NAHB’s Chief Economist and Senior Vice President for Economics and Housing Policy, hiring in the construction sector weakened to a 4% rate in November 2022. The post-virus peak rate of hiring occurred in May 2020 at 10.4%. Construction sector layoffs held at a 1.7% rate in November 2022. In April 2020, the layoff rate was 10.8%. Since that time, the sector layoff rate has been below 3%, with the exception of February 2021 due to weather effects.

The number of quits in construction in November 2022 (138,000) was significantly lower than in November 2021 (215,000),” stated Dietz. “The housing market remains underbuilt and requires additional labor, lots and lumber and building materials to add inventory… Looking forward, attracting skilled labor will remain a key objective for construction firms in the coming years. However, while a slowing housing market will take some pressure off tight labor markets, the long-term labor challenge will persist beyond the ongoing macro slowdown,” said Dietz.

Locally, From February 2020 to November 2022, Jones cites Missouri as having +0.5% change in jobs while Kansas remains in the red at -1%. Job growth from October to November 2022 stood at 0.3% in Missouri and 0% in Kansas.

Inflation and Mortgage Rates

According to NAHB Economist Fan-Yu Kuo, national consumer prices in December 2022 saw the largest month-over-month decrease since April 2020. While still elevated, inflation experienced the third month below an 8% annual growth rate since February 2022. Moreover, this was the sixth consecutive month of a deceleration. However, the shelter index (housing inflation) continued to rise at an accelerated pace and was the largest contributor to the total increase. While inflation appears to have peaked and continues to slow, inflation in core service (excluding shelter) has not begun to ease.

The Federal Reserve continued to fight high inflation in 2022, resulting in a rapid increase in mortgage rates. NAHB Senior Economist Na Zhao highlights that the U.S. weekly 30-year fixed-rate mortgage rose from slightly above 3% in early 2022 to more than 7% in late October 2022 and leveled off at a rate of 6.42% as of the end of the year. Mortgage payments increased from $1,925 on a median priced new home in early 2022 to $2,923 on the same house, a 51% increase.

Approximately 45 million households were able to qualify for a mortgage to purchase a new home at the beginning of 2022, before mortgage rates increased. The increase from 4.22% to 5.22% as of early May 2022 priced an additional 5 million households out of the market for the median-priced new homes.

When mortgage rates jumped to 7.08% in late October, only 20.3% of households could afford a median priced new home. This means approximately 18 million households nationwide were priced out from the start of 2022 to October 2022, according to NAHB. Looking forward to 2023, Jones predicts mortgage rates to be in the 6-7% range.

Potential Silver Linings

Housing material shortages have been widespread for years now. As of October 2022, NAHB reports these shortages have overall eased since May 2021, with the major exceptions currently being shortages of HVAC equipment and certain categories of ceramic materials.

NAHB is forecasting a decline for single-family starts this year compared to 2022, but it appears a turning point for housing could lie ahead. According to Dietz, “the rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”