John Femenia: Will Real Estate Prices Continue to Increase in 2023?

 

We all know that in the long-term real estate is a good investment.  But what about right now?  In the past 12 months, the federal reserve has increased rates at the fastest pace in the past few decades. Inflation is running at the highest rate in 40 years.  Home prices are up over 10-15% from last year.  Will real estate prices continue to increase?

 

Before we answer the question of where prices are going, we first need to go back to see what got us to this point.  In the past three years, mainly since the pandemic, the housing market was fueled with cheap money (low mortgage rates) and a huge increase of activity from people wanting to relocate.  There was also a large period of under building new housing inventory for the years leading up to the pandemic.  Most builders thought that millennials would not want to move to the suburbs, and thus did not invest heavily in new single-family construction.  This proved to be incorrect, and the pandemic pulled forward many of the young people moving to the suburbs.  This caught many of the home builders flat footed, many of whom had low inventory.  All of these factors caused a huge increase in home prices.

So what has changed?  First off, rates have increased from under 3% to over 7% for conventional mortgages.  This has caused the cost of owning the same single-family home to increase over 60% to end of 2020 to now.   Wages have increased, but not by nearly as much. Also, while people are still relocating to lower tax states with better weather (Florida and Texas), it's at a much slower pace. Also, home builders picked up the pace of building.  They're now offering more incentives to sell homes, which is a sign of lower demand.

It's my opinion that rates will remain high over the next 12 months as inflation has been slow to come down.  While home prices remain elevated, they're starting to come down.  It's always a slower process when prices come down, as homeowners are reluctant to lower prices. However, as properties sit on the market for longer and longer, sellers will eventually come to reality and lower prices.  While some markets will see larger decreases than others, it's my opinion that prices will fall 10-15% over the next 12 months. 

 John Femenia has over 15 years for finance experience.  His company, Source Reatly Capital, has closed over $200 million of loans for real estate investors.  

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