Housing Market 2023: When Will Home Prices Be Affordable Again?

The housing market’s outlook for October 2023 remains bleak, overshadowed by the challenges of soaring mortgage rates, escalating home prices, and a limited supply of available homes. This trifecta of issues continues to fuel the ongoing housing affordability crisis, making it increasingly difficult for prospective buyers to enter the market.

To compound the situation, the Federal Reserve is contemplating yet another increase in the federal funds rate by the end of this year to combat inflation. The federal funds rate, which stood near 0% in March 2022, has seen 11 consecutive hikes, bringing it to the current range of 5.25% to 5.5%, marking the highest levels seen in 22 years.

Fed projections indicate that the terminal federal funds rate could reach 5.6% by the close of 2023, implying the possibility of at least one more 25 basis-point rate increase this year. Although changes to the federal funds rate indirectly impact mortgage rates, experts are now more concerned about the Fed’s long-term plans for interest rates rather than a minor increase this year.

Keith Gumbinger, vice president at mortgage website HSH.com, emphasizes the significance of the Fed’s intentions and how long policymakers plan to maintain elevated rates, as well as when they might initiate rate cuts. During their September meeting, Fed policymakers hinted at the likelihood of interest rates staying “higher for longer,” with policy rates potentially remaining half a point higher until the end of 2024 and 2025, according to their latest projections.

Given these indications, many experts in the housing market anticipate that mortgage rates will continue to remain elevated not only for the remainder of this year but potentially extending into 2024, further adding to the challenges faced by homebuyers.

When Will the Housing Market Recover?

The path to housing market recovery, according to experts like Gumbinger, hinges on specific conditions. One crucial factor is a substantial increase in home inventories available for sale. This surge in supply would alleviate the upward pressure on home prices, potentially leveling them off or even causing a slight decrease from their peak levels.

Additionally, a necessary shift involves moderation in interest rates. However, Gumbinger emphasizes the importance of a gradual decline in rates, cautioning against rapid falls. A sudden plunge in rates could trigger a surge in demand, negating any progress made in inventory gains and causing home prices to rise once again.

According to Gumbinger, it’s preferable for rate reductions to occur steadily, improving buyer opportunities incrementally over time, rather than all at once. Returning mortgage rates to a more “normal” range, specifically in the upper 4% to lower 5% bracket, could contribute to the housing market’s recovery, eventually bringing it back to the levels observed between 2014 and 2019. However, Gumbinger anticipates that it might take a considerable amount of time before reaching these favorable rate conditions.

Where Do Mortgage Originations Currently Stand?

The current mortgage landscape presents a challenging scenario for potential homebuyers. With the average 30-year fixed mortgage rate hovering above 7%, the prospect of a 5% mortgage rate seems distant. Despite these high rates, mortgage originations saw an uptick in the second quarter of 2023, totaling $463 billion, compared to $333 billion in the preceding quarter, according to data from the Mortgage Bankers Association (MBA).

However, the MBA anticipates a decline in originations, expecting subdued activity throughout the remainder of 2023 and into early 2024. The current mortgage spread, representing the difference between the 10-year Treasury bond yield and the 30-year fixed-rate mortgage, stands at around 300 basis points. Historically, this spread should be between 150 and 200 basis points. A return to a more normalized spread could encourage hesitant homebuyers to re-enter the market.

The timeline for this spread to narrow remains uncertain. Odeta Kushi, deputy chief economist for First American, suggests that the spread might decrease as the Federal Reserve completes its monetary tightening, possibly in the coming months. If this occurs, mortgage rates could decrease, even if the benchmark 10-Year Treasury rate remains unchanged.

Housing Inventory Outlook for October 2023

he housing inventory situation in October 2023 continues to present significant challenges, especially in the realm of entry-level housing. The supply of homes remains at historically low levels, exacerbating demand and sustaining the excessively high prices of homes.

Adding to the problem, new home construction, which had been helping alleviate some of the shortages, has declined in recent weeks. According to Jack Macdowell, chief investment officer, and co-founder at Palisades Group, the inventory shortage is strikingly pronounced, with current levels approximately 46% below the historical average dating back to 1999. Unfortunately, there is a strong consensus that this inventory problem is unlikely to be resolved in 2023.

Existing Homes