What’s the real estate market going to do in 2023? Nobody has a crystal ball, but here are some emerging trends. Scroll quickly or digest slowly.
UPCOMING (PUBLIC) SPEAKING GIGS:
1/12/23 McKissock / Appraisal Buzz Webinar (register here)
1/18/23 WCR Market Update in Cameron Park (register here)
1/19/23 Big market update at SAR on Zoom (register here)
1/20/23 NARPM Luncheon
1/23/23 Residential RoundUP on Zoom (register here (free))
2/8/23 SAFE Credit Union “Snacks & Facts” (for RE) (register here)
3/10/23 PCAR Market Update Lunch & Learn (detailed TBD)
4/1/23 NAA Conference in Sacramento
NOTE: The housing market isn’t the same in every part of the country. I hope you get some value here, whether you’re local or not.
THINGS TO WATCH IN 2023:
Volume will be subdued: There is an obsession with prices in real estate, but the bigger story is volume. Many markets across the country saw a lower number of sales last year in light of mortgage rates doubling, and in the Sacramento region we’re missing about 40% of buyers from the pre-pandemic normal. In short, it’s going to take time to get these buyers back, so we’re poised to see subdued volume until affordability gets better.
Prices are poised to decline: We’ve seen a sharp decline in prices since May 2022, and for now that’s poised to continue since the market is still not affordable for the bulk of buyers. So far 51% of pandemic home price gains have been wiped away when looking at the median price, and unless some unexpected stimulus arrives to help buyers afford higher prices, we’re going to need to see prices come down more to get buyers back into the game. Keep in mind sometimes prices flatten, rise slightly, or outright drop during the spring season of a declining year, so we’ll see what happens in coming months.
Lifestyle buyers and sellers will be on the move: Some prospective buyers are sidelined, but there will still be lots of deals happening. This year we should expect to see lifestyle buyers and sellers making moves. Divorce, death, moving up, moving down, retiring, buying a first home, moving out of state, relocating, inheriting money and parking it in real estate, etc… There are lots of reasons why people buy and sell, and that’s not going to stop this year even though we’re poised to have lower volume.
Fighting for objectivity in 2023: In the midst of quick change, there is going to be a battle of real estate narratives. There is a rosy outlook that tends to sugarcoat and focus on prices rebounding. And there’s a doom narrative that says the grim reaper is coming and we’re all going to die. My advice? Be real about the trends, know the stats, and be cautious about people selling hype or fear. I say cultivate objectivity, and try to let the stats form your narrative. And yes, I shared an Emily in Paris meme. That’s a new high or low. You decide.
People will pay attention to property taxes again: When home prices are increasing, homeowners tend to not pay attention to their property taxes, but that’s going to change this year. My advice is to understand how the appeals process works. Here’s an old post to get you up to speed. Notably, new property taxes for 2023 in the region aren’t going to post until July 2023, so there is nothing you can do right now to dispute your property taxes for a typical appeal situation.
The color of the year: Pantone‘s color of the year for 2023 is called Viva Magenta and here’s what it looks like. We’ll see if this shows up in design more often. If anything, a little more color would be welcome after an intoxication with gray and a couple of dreary pandemic years. What are you seeing in homes lately? More color? Less color?
Fewer appraisal waivers this year: When the market was ultra hot last year, we saw about twice as many appraisal waivers happening during purchases according to AEI stats. I’m not talking about the buyer waiving the appraisal contingency, but rather Fannie Mae and Freddie Mac waiving the appraisal. In light of changing market conditions, appraisal waivers have seemed to diminish as only about 15% of purchases in October 2022 had an appraisal waiver. In other words, don’t expect an appraisal waiver during a purchase. It could happen, but it’s been less common. Read AEI’s report here (PDF).
Buyers will get more from sellers: Sellers have been doing a better job offering credits to buyers, and they’re going to have to keep doing that. Buyers are still sensitive about what they pay, and they’re going to be picky about the condition and location of the house too. Granted, homes that check all the boxes can still get multiple offers, but that doesn’t always lead to selling over the asking price in today’s market. Ultimately, sellers ought to be prepared to offer credits and incentives as needed.
Subdued inventory is likely: It’s hard to say what will happen to listings exactly, but it’s really sparse out there still. This is true nationally, and it’s definitely true locally. Frankly, the only reason why we technically have an almost normal level of listings locally is due to more properties staying on the market since fewer deals are closing. In short, sellers have NOT been rushing to list. This is exactly why buyers have been feeling like inventory is stale. Backing up, many owners have less incentive to list due to being locked into a low mortgage rate and/or not being able to afford the market right now. So, unless something happens to trigger more listings, we seem poised to see sparse inventory ahead. I do expect to see a seasonal uptick in listings in coming months because that’s normal, but we don’t usually start to see noticeably more listings until March and beyond.
More buyer attention during the spring: Even though prices are going down, we should see some seasonality ahead. Buyers are hungry for quality listings, and there is growing attention for the spring season. During the spring, even during a declining market, it’s normal to see an uptick in sales (even though the number of sales is still way down). I’m already hearing agents ask stuff like, “Does anyone have a listing coming up in XYZ neighborhood?” Sometimes prices even show a slight increase during the spring during a declining year, but that’s to be determined ahead. I wrote more about spring seasons here.
Credibility will be won and lost: Some real estate professionals are going to gain credibility and others will lose it this year. Some folks are going to get caught making predictions that don’t come true, and it’s going to be a bad look. This is like when people say, “Inventory is so low, so prices can’t go down.” That seems legit on paper, but the problem is it’s false. Prices have been dropping despite low inventory. Or some will make promises like, “Just buy now and refinance later. Date the rate, marry the mortgage. Blah, blah, blah.” My advice? Be real about market trends, help buyers and sellers make lifestyle decisions without any pressure, and don’t promise a future you can’t control.
X-factors to NOT ignore: What happens with the economy, inflation, jobs, and mortgage rates can change the market. For now, the Fed has been blatant about slowing down the economy and bringing pain to the housing market, and it’s not a bad idea to believe they are committed to this plan. A local brokerage told me they are cutting expenses for 2023, and I think that’s wise. Look, if something unexpected alters the market, so be it. But planning for a subdued market is fitting since that’s what the stats are pointing toward.
Distressed sales will increase: We’ve basically hit bottom when it comes to bank-owned sales and short sales, so there isn’t any place to go but up. These properties are still a drop in the bucket, so it’s hype to say a foreclosure wave is coming to town this year. We should see more short sales though in light of a quick change in prices over the past eight months. More here.
Affordability will improve for some: Affordability is going to get better for some this year as prices presumably dip. Moreover, it’ll help if mortgage rates go down too. I won’t touch mortgage rate predictions because mostly everyone gets that wrong. Lots of mortgage professionals are saying rates will be 5.5% in a number of months, but we’ll see. I get the idea of rates dropping during a recession, but how many people can you name who predicted in 2021 that rates would hit 7% last year? All I’m saying is there’s humility when it comes to making predictions. And speaking of the future, I just want to know who is going to win the Superbowl and whether the Sacramento Kings will make the playoffs.
Buyers will run the show: There is often favoritism in real estate toward sellers, but it’s time to speak to buyers. 2023 is poised to be a year where buyers very likely get to run the show again like they have for the past two quarters. This doesn’t mean buyers can offer 30% below market value or flex like it’s 2007, but sellers are not able to call all the shots. My advice to buyers this year is to be patient, make sure you are comfortable with the mortgage payment, and get the best deal the market will give you. Oh, and buyers, recognize that competition is different, but it’s not dead.
Data mistakes will be common: There is going to be a learning curve for talking about the market and figuring out which stats to focus on. I suspect some people will be too focused on year-over-year stats, and others will get too hyper-focused on change from May 2022 onward. Here’s a post I wrote to talk about annual data vs monthly data. This is nerdy stuff, but it’s SO important for anyone serious about exuding real estate expertise.
Hybrid appraisals are being pushed: There is a move to see more hybrid appraisals where someone else does the inspection, and then the appraiser does the “value part” so to speak after getting property details from the inspector. This is a model that is being pushed, and I wouldn’t be surprised to see it gain ground this year. Personally, I only do private appraisals on purpose to avoid this type of a product, but that’s another blog post.
New partition law: If you don’t know what a partition is, it’s a legal process by which one of the co-owners basically forces a sale. My attorney friend Eli Underwood gave me a heads-up about the Partition of Real Property Act in California and appraisals now playing a more prominent role (not quite being required, but required unless all the parties agree to a valuation). I expect to have more appraisals like this on my desk in 2023, but that’s not why I’m mentioning it. Real estate friends, I suggest being aware of stuff like this and forging relationships with attorneys, property managers, and CPAs to delve into different types of business.
iBuyers will try to survive: The market changing last year was brutal for the iBuyer model, and these companies are going to have to adapt to stay in the game. iBuyers have been getting destroyed by such big price declines, and even their public stocks have been disastrous. The unnatural part here is these companies have been backed by so much money that they’ve been able to stay in the game despite losses. I’ve seen Opendoor pivot to buying fewer properties, and if I were to give advice to this company, I’d say they’re going to have to acquire at a bigger discount to account for price declines and credits, and they’re also going to need to be more efficient about cutting time between acquisition and listing. There is lots of speculation about Opendoor failing, but we’re going to have to wait and see. All I can say is Opendoor is still buying and selling locally, and the iBuyer model represents about 5% of all listings and pendings locally. Lately this model has been contracting, so I suspect the goal ahead is to stay alive rather than rapidly grow. I could be wrong.
Taking mental health seriously: I guess it sounds ironic to talk about obsession with real estate since I’m a guy constantly sharing housing stats, but I think some people this year are going to need to opt out of real estate conversations for the sake of mental health. Look, if you’re feeling depressed after reading articles or social media housing posts, maybe it’s time to distance yourself, do some inner work, and/or unsubscribe (even from my blog). My advice? Take your mental health seriously by cultivating peace and contentment regardless of what the housing market is doing. It’s honestly really hard to stay grounded in today’s world with so much sensationalism and such a lopsided focus on what the future holds. But this is the task at hand, and lots of people are losing joy today because of what the future may or may not bring. Here’s the way I look at it. We don’t know how long this downturn will last, but historically downturns in California at least are often five to six years. So, here’s the question. Am I going to be filled with anxiety every day for years ahead? And am I only going to be happy in an up market? I know this sounds silly to some, but this is real stuff. I talk to people all the time who are paralyzed with fear, and I even talked with someone this year who had suicidal thoughts due to prices going down. Friends, please be intentional about taking care of yourself. Nobody else can do that for you.
Some sellers are going to struggle with pricing: Sellers have gotten a bit better about listening to buyers, but some are going to struggle to recognize how different comps are today from May 2022, and that’s where overpricing is going to happen. “But Pablo next door sold for $650K in May…”
I hope that was helpful.
Questions: What else do you think will be important in 2023? Did I miss something? I’d love to hear your take.