As the anticipation of winter looms in the distance, the housing market, already showing signs of cooling due to staggering home prices and escalating interest rates, appears to be on the brink of a significant slowdown.

The national average 30-year mortgage rate climbed for the seventh consecutive week, hitting a daunting 7.79% by the week ending October 26, as reported by Freddie Mac. Unsurprisingly, given these current rate conditions, year-over-year existing home sales faced a decline for the third consecutive month, dropping by 0.7%. This decline was consistent across all four major U.S. regions, according to the National Association of Realtors (NAR).

Nevertheless, the housing market continues to present a competitive landscape for potential buyers. The dilemma persists as many homeowners are “locked in” at historically low interest rates and are hesitant to sell, resulting in demand consistently outpacing available inventory.

Housing Market Forecast for October 2023

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, 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

In August, the inventory of existing homes showed a slight improvement, but the positive momentum was short-lived. According to the National Association of Realtors (NAR), existing-home stock declined by 0.9% in August. The available unsold inventory remained unchanged month-over-month, maintaining a meager 3.3-month supply at the current sales pace. Housing experts typically consider a balanced market to have four to six months’ worth of inventory.

Existing-home sales also continued to struggle, dropping by 0.7% in August and a staggering 15.3% compared to the previous year. Apart from a minor increase in April, year-over-year home sales have consistently declined since February. The outlook for the near future appears bleak, as pending home sales, a key indicator, plummeted by 7.1% in August, marking an 18.7% decline from the previous year.

Lawrence Yun, the chief economist at NAR, emphasized the need for increased housing inventory and improved interest rates to breathe life back into the housing market.

New Homes

In August, the inventory of new homes continued its decline, with a seasonally adjusted estimate indicating only 436,000 houses available for sale at the month’s end. This translates to a 7.8-month supply at the existing sales pace, down from 8.7 months recorded a year earlier, as per the latest data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD).

During the same period, new home sales experienced a sharp decline, dropping by 8.7% to a seasonally adjusted annual rate of 675,000. The fall in sales cannot be solely attributed to high mortgage rates and soaring home prices, according to experts. Rather, the primary cause appears to be the insufficient supply of new homes in the market.

Robert Frick, a corporate economist with Navy Federal Credit Union, pointed out that while elevated mortgage rates and home prices contribute to the challenge, the substantial dip in new home sales during August can be largely attributed to the scarcity of available properties. Builders are finding it difficult to meet the growing demand due to various constraints, exacerbating the situation.

Will the Housing Market Crash in 2023?

Amidst the upward march of mortgage rates, home prices have surged, reaching record highs in July 2023, marking the sixth consecutive month of gains. According to the latest S&P CoreLogic Case-Shiller Home Price Index, national home prices rose at an annual rate of 1%, with a 0.6% increase observed between June and July after seasonal adjustment.

Craig J. Lazzara, managing director at S&P DJI, noted the robust rally in U.S. home prices, with the National Composite rising by 5.3% on a year-to-date basis, surpassing the median full calendar year increase recorded in over 35 years of data. Despite these gains, there were stark regional disparities. Leading the pack were Chicago (+4.4%), Cleveland (+4.0%), and New York (+3.8%) in July, while pandemic boomtowns like Las Vegas (-7.2%) and Phoenix (-6.6%) witnessed plunging home values. The West (-5.9%) and Southwest (-3.6%) regions also experienced notable declines.

Despite these fluctuations, the likelihood of a housing market crash—characterized by a rapid drop in unsustainably high home prices due to waning demand—remains low. Experts point out that current homeowners are in a more secure position compared to those post-2008 financial crisis, with many borrowers having positive equity in their homes. However, Dan Hnatkovskyy, co-founder, and CEO of New Homes Mate, a marketplace for new construction homes, sees a potential price collapse on the horizon, particularly in markets where real estate investors have acquired numerous properties. emphasized that if external factors push the market over the edge, the consequences could be severe.

When Should I Buy a Home in 2023?

Deciding when to buy a home is a deeply personal choice, regardless of the market conditions. Given that homes represent one of the most significant lifetime investments, being financially stable is essential before making such a decision.

Orphe Divounguy, senior macroeconomist at Zillow Home Loans, emphasizes that attempting to predict the ideal time to buy in the ever-changing housing market is nearly impossible. Instead, he suggests that prospective buyers should focus on finding a home that suits their current and future family needs and falls within their budget.

Keith Gumbinger, vice president at mortgage website, agrees, stating that waiting for better market conditions can be futile. Home prices tend to rise over time, making it challenging to amass a down payment if one keeps postponing the decision. Divounguy adds that taking the step onto the property ladder is a valuable endeavor, allowing individuals to start building equity and net worth. Ultimately, the right time to buy is when the home aligns with your needs and financial capabilities.

Pro Tips for Buying in Today’s Housing Market

  • Explore Lower-Priced Markets: If your job allows remote work or offers flexibility, consider moving to a more affordable housing market.

  • Prepare in Advance: Organize your finances, gather necessary documents, consult multiple lenders, and work on improving your credit score. Being prepared enables quick decision-making.

  • Stay Informed: Regularly monitor property prices and listings to stay ahead of the competition. Being proactive can give you an advantage in a competitive market.

  • Understand Your Budget: Calculate your monthly payments, including taxes, and ensure they align with your budget. Understanding the financial implications is crucial.

Expert Tips for Sellers in Today’s Housing Market:

  • Consult a Real Estate Agent: Collaborate with a real estate agent to set the right price, foster buyer competition, and increase the chances of a faster sale.

  • Enhance Your Home’s Appeal: Prepare your home for sale promptly. Invest in necessary repairs and improvements to make it more attractive to potential buyers.

  • Leverage Online Presence: Boost your home’s online curb appeal. High-quality photos and detailed descriptions can significantly enhance your property’s online visibility and attractiveness.

  • Use Interactive Tools: Include interactive elements like 3D home virtual tours or interactive floor plans in your listings. These features can increase page views and save your listing for potential buyers.