Real Estate Weekly: December 30, 2022

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Predictions for the 2023 real estate market

By Erik J. Martin CTW Features

Curious about where mortgage rates will land next year? Eager to know if it will be more of a buyer’s market than a seller’s market? Wondering how much rental rates will increase in 2023? You’ve got burning questions about the housing market heading into the new year, and we’ve got answers, courtesy of experts across the real estate industry we polled on these and other related topics.

One of the most trusted industry resources is the National Association of Realtors. They recently predicted that home sales will decline by 7% in 2023 while the national median

home price will go up by 1%. That bodes well for home seekers eager to score a deal on a more affordable home.

Nik Shah, CEO of Home. LLC, expects national home prices to continue rising in 2023, although at a slower pace (around 3.5%) than we saw in 2022.

“There are four big reasons for this. First, consider the massive undersupply of homes for sale. The housing market is undersupplied by almost 1 million units versus the historical norm,” he says. “Secondly, most housing inventory comes from existing home sales, not new construction. But supply from existing homes will keep decreasing because 90% of mortgage holders

are on a mortgage rate below 5%. Most home sellers will wait for mortgage rates to fall before listing their homes for sale. Also, high residual demand means there’s lots of room for both home prices and homeownership to grow. And delinquency and foreclosure risk is extremely low because of stringent underwriting criteria introduced after the 2008 housing crash.”

Shah expects housing inventory to make marginal gains next year and end 2023 with between 1.8 and 2 million single-family housing units, up from the current supply of 1.57 million. More housing supply means less competition from buyers.

“The 2023 real estate

market is likely going to follow the second half of 2022, which means it will be even slower for selling with more leverage for buyers,” says David North, a broker with Realtrua in Redmond, Washington. “In some places, prices are likely to fall substantially, while elsewhere they may stay closer to firm but with far fewer sales.”

Ask Colleen Cassel, real estate agent with Compass in New York City and she’ll tell you that there won’t be a huge downturn in pricing next year, with slight decreases that will vary by market.

“Mortgage rates will maintain somewhat steady to what you are seeing today – in the ballpark of

6.6% for the 30-year fixedrate mortgage. If inflation slowly declines, you may see a slight decrease, while the 15-year fixed rate will be slightly lower, averaging 6.2%,” she forecasts.

David Hampshere, CEO of Purple Egg Real Estate, foresees mortgage rates averaging around 6.5% and 6.0% for the 30-year and 15-year mortgage loans next year.

“I expect home prices will remain steady, as there is still a lot of unmet need for housing from those who can afford it. But with interest rates expected to remain high, it will reduce the pool of buyers, causing prices to remain flat,” explains Hampshere. “And when it comes to homes for

sale, days on the market will go from just a few days to at least a month. There was a lot of panic buying when the rates were low, but now that these inexperienced buyers have left the market, more due diligence will be done by purchasers.”

When it comes to rents, Boyd Rudy, associate broker with Dwellings Michigan, expects rent prices to remain relatively stable with a slightly higher availability of rental units in the coming year.” This is because many people who were living in urban areas have started moving to suburban areas, which led to an increase in the number of vacant apartments,” Rudy explains. “Additionally, many landlords are becoming more flexible with their lease terms, making it easier for many people to find affordable rentals.”

Kevin Bazazzedeh, the owner of Brilliant Day Homes in Houston, believes rents will decrease on a national level, although we shouldn’t expect a major decrease.

“Overall, I am anticipating a down year in the real estate market in 2023,” Bazazzedeh notes. “The Federal Reserve raising the Federal Funds rate has led to mortgage interest rates increasing and has created a substantial reduction in purchasing power for homebuyers. With no plan next year for a decrease from the Fed and a target of higher unemployment, it would be unrealistic to believe that the real estate market would improve.”

Financing with an ARM

Question:

Mortgage rates more than doubled during 2022. Given the increase we’ve seen with fixed-rate mortgages doesn’t it make sense to finance with an ARM?

Answer:

A growing number of borrowers plainly think that adjustable-rate mortgages – ARMs – are an attractive financing option. According to Joel Kan, Vice President and Deputy Chief Economist with the Mortgage Bankers Association, ARM originations represented 12.8% of all applications in mid-October, the highest share since March 2008.

“ARM loans,” said Kan, “continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments.”

There are several reasons to consider ARMs.

First, a quick look at rates tells much of the story. In late October, according to Freddie Mac, the typical fixed-rate mortgage was priced at 7.08% versus 5.96% for 5/1 adjustables – loans that have a fixed-rate for five years and then vary each year thereafter. Borrow

$250,000 with fixed-rate financing and the cost per month for principal and interest is $1,677. With an ARM the cost falls to $1,492 for five years. In year six and beyond the monthly cost can rise or fall.

Second, the lower initial ARM cost is a big deal for many borrowers. The smaller monthly cost saves the borrower $185 a month in cash in our example, or $2,220 a year. In turn, ARM borrowers are able to reduce their monthly debt-to-income ratio (DTI), a key measure used by lenders to determine who gets financing and who doesn’t.

Third, ARMs have more upside risk than fixed-rate financing because future rates and monthly payments can rise. If monthly costs go up and income remains steady or declines, such higher loan expenses can be a burden.

That said, ARM risk is limited by several factors.

There are caps in place that limit annual and lifetime rate increases.

Loan size will decrease over time with amortization, the monthly debt reduction that occurs with each payment. The result is that when ARM rates do adjust

Q&A Q&A

ASK OUR BROKER

By Peter G. Miller

the new payment is based on less debt.

For instance, in our ARM example the loan balance drops to $232,521 after five years. If the interest rate goes up to 7.5% in year six, 25 years remain on the loan term and the monthly payment goes to $1,718. That’s a cost increase of $226 per month. However, think about what you earned five years ago. Hopefully, the higher expense will be offset with a larger income.

Borrowers can get a longer start rate if they elect, say seven or ten years rather than five. Longer start rates mean more risk for lenders, so rates are likely to be higher.

Ask loan officers to provide today’s rates for three-, five-, seven-, and 10-year ARMs and for fixed-rate financing. What’s the maximum ARM payment after the start rate ends? Be sure to look not only at interest rates, but also at the fees, points, and charges associated with each mortgage option. Check the total cash costs for the loan after five years.

Email your real estate questions to Mr. Miller at peter@ctwfeatures.com.

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Falling for the heart of a home

By Marilyn Kennedy Melia CTW Features

A fully renovated kitchen, closely followed by a kitchen upgrade, is catnip to buyers. A study from the National Association of Realtors (NAR) finds these kitchen projects are the improvements that appeal to buyers the most.

But once a kitchen makeover is complete, owners may not feel much like selling. Owners report enjoying their home more and wanting to stay home more following kitchen improvements.

No wonder, then, the real estate agents say they often see owners renovate their kitchen two or three years before they plan to sell.

The “enjoy your kitchen while boost-

ing sale appeal too” approach might even lead to a better renovation, believes Ines Hegedus-Garcia of Avanti Way Realty in South Florida. This is since owners are “completing the project for their own enjoyment and not just for resale purposes,” observes Ines Hegedus-Garcia of Avanti Way Realty in South Florida.

But owners have to be careful not to use a “look that is going to broadcast the year you did it,” warns Kathryn Bishop, of Keller Williams Realty, Studio City, California.

Instead of looking to TV home shows for inspiration, ask a real estate agent for advice on what buyers in your area want, and what design trends have staying power, Hegedus-Garcia suggests.

Visit newly constructed homes nearby for insights on appealing kitchen elements in your area, adds Bishop.

Often, strategic upgrades might see a greater payback at the sale. “The replacement of appliances can make a huge difference,” says Nicole Galluzzo of HomeSmart Realty Group, Lakewood, Co.

Indeed, the NAR study finds that while kitchen projects score highest on a “joy” measure, less than 60 percent of the cost is recovered in a higher sale price.

The biggest payback, returning 107 percent of the cost, is a new roof, according to the NAR.

Everybody loves a new kitchen and that poses a problem for homeowners planning to sell

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