In this month’s edition of our Charlotte area real estate blog, we take a look at anticipated market conditions and performance in 2023. There has been speculation about a national economic recession, inflation and their effect on residential real estate. But, of course, real estate markets (like politics) are largely local, and they can vary a great deal depending on the city. Cities like San Francisco and Seattle are expected to see the largest declines in property values, but most other cities in the country are expected to see values decline by only five to ten percent between January and August of 2023. We do not expect a significant decline in values in the Charlotte metropolitan area. Here is why:
The
total inventory of homes
available for sale in the Charlotte metro area
has fallen from over 9,000 units in October of 2018 to under 1,900 units in
February of 2022, but by November of 2022, inventory had rebounded to just
under 6,000 units. Of course, it is
axiomatic that a shortage in the supply of anything, combined with a larger
list of ready, willing and able buyers, causes the value/price of almost
anything to rise. If that is true, one
would have expected more of a “buyer’s market” in 2018; and one would logically
expect more of a “seller’s market” in November of this year, with a large
number of buyers chasing relatively few homes available for sale. That general principle has played out in
Charlotte over the last several years.
And as inventory of homes available for sale has risen again—but only to
a bit more than half of overall inventory in 2018—wild price increases we had
seen in 2020 and 2021 moderated a bit toward the end of 2022. But the market in Charlotte remains strong.
Another
major factor in the health of the housing market is mortgage interest
rates. In October of 2021, 30-year fixed
rate mortgages were being written at a rate just above 3%. But with the Federal Reserve’s efforts to
curb inflation resulting in higher interest rates, the current
rate for a 30-year fixed rate mortgage has more than doubled to
over 6%. Of course, this has an obvious
impact on the affordability of a home. For
example, a $300,000 mortgage at 3.25% over 30 years would require monthly principal
and interest payments of $1,306. The
same $300,000 mortgage at 6.5% would require principal and interest payments of
$1,896 per month. The same property at
the same price is likely to cost a buyer $590 per month more in 2023 than it
did in 2021. That simple fact can remove
many buyers from the market, although it is useful to put this into some historical
context. The interest
rate for a 30-year fixed rate mortgage in the 1970’s was almost 7.5% By the end of the 1980’s, that average rose
to 8.78%. Rates ended the 1990’s (a time
generally associated with good economic conditions) at over 8%. So our current rate of about 6.5% is not
close to being historically high.
The
good news with respect to mortgage interest rates is they have not risen as far
or as fast as some of the experts predicted, and they have not risen in direct
proportion to interest rate hikes by the Federal Reserve. There are a number of reasons for this,
mostly related to the somewhat complicated functioning of the market of large
institutions who purchase recently closed mortgages. The institutional demand for closed,
performing mortgages remains strong; and this has placed some downward pressure
on mortgage interest rates for consumers.
This phenomenon has led some economists to expect mortgage interest
rates to rise more slowly and less aggressively in 2023. Moreover, many believe the Fed’s efforts to
bring inflation under control are largely working and, if they are, the
likelihood of continued increases in the Fed’s prime rate beyond mid-2023 seems
smaller.
Putting
the above factors together and applying them to the Charlotte home market leads
us to the opinion that values/prices are unlikely to fall significantly in our
metropolitan area in 2023. Demand for
housing in Charlotte is very likely to remain strong. Charlotte
is currently the 8th fastest growing city in the U.S.,
with no signs of slowing growth. If
anything, the growth is accelerating, and this will continue to fuel
demand. The law of supply and demand,
together with less of an increase in mortgage interest rates than many expected
in 2023, will likely mute any downward pressure on property values in the
area. The days of low interest rates and
low inventory causing increases in property values of 20% are gone for a
while. The market in 2023 is likely to
be at least a bit more buyer-friendly.
But we do not expect any significant decreases in sale prices, much less
any sort of bursting housing bubble. The
residential real estate market in the Charlotte metro area is likely to become
more stable and healthy throughout 2023 in our view.
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