If you’re looking to buy a new home in 2023, you need to know the state of housing inventory, current buyer demand, and importantly, where mortgage rates are presently.
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If you’re looking to purchase a new home in 2023, there are a lot of things to think about.
I’m sure you’ve already heard all of the top-level headlines — that the housing inventory is low, demand is still high and that mortgage rates have skyrocketed.
But unless you do some research and understand the details behind those headlines, it’s hard to know exactly how this tight real estate market might affect you.
Luckily for you guys, I’ve done that research for you — and in this article, I’ll take a deeper dive on what the current home inventory situation is, what the rising mortgage rate literally means for you, from a cash out of pocket standpoint, and what you can do to give yourself the most advantage — if you need to buy a new home in this challenging market.
1) State of the Mortgage Rate
Let’s start off with an assessment of the mortgage rate.
According to MortgageNewsDaily, the current 30 Year Fixed Mortgage Rate is hovering at 7.66% — as of October 13th, 2023. This is a difference of 501 basis points from January of 2021, where the 30 year fixed mortgage reached a historic low of 2.65%.
So what caused this drastic increase in the mortgage rate from 2.65% all the way up to 7.66% — in less than 3 years time?
To understand this – we have to take a quick sidebar into the topics of inflation and interest rate hikes.
Inflation, put in very simple terms, is when everything gradually gets more expensive over time and the purchasing power your money decreases. For example, 5 years ago, you could go to almost any sit-down restaurant and get a nice meal for under $15. Now, that same meal will cost you upwards of $20, or even more, especially if you count the increase in tip percentages lately.
And during the pandemic years of 2021-2022, we’ve seen inflation rise nearly 7% every single year. And the reason why? It’s mainly due to the fact that the pandemic shutdowns have cause our entire global supply chain network to slow to dismal crawl. We’ve seen many freight lines & production factories, closed or working in limited capacities to safeguard their employees – and as a result, the global output of goods, from raw food ingredients like chicken and eggs, to tech products like automobiles and laptops, have decreased significantly.
At the same time, because most of the US population was on lock down, our day-to-day living activities have shifted – with many people ordering more home office furniture, and others picking up new hobbies like gardening, cooking and even golf. This, of course, increased the demand for products associated with these changes, like desks and shovels and golf clubs – while at the same time, the manufacturing & distribution of these items slowed, due to the previously mentioned supply chain reductions.
This in turn, caused many of the raw material producers to raise their prices, which of course, meant that retail companies and restaurants had to raise their prices as well – making everything significantly more expensive and increasing inflation.
And to conclude this sidebar on inflation, when the inflation rate gets out of hand, the Federal Reserve is tasked with bringing down that rate to a more manageable level – by enacting interest rate hikes and making the borrowing of money in this country harder. When it’s harder to borrow and spend money, there’s less consumer spending, which lowers the demand on goods, thereby forcing raw material producers, retailers and restaurants to lower their prices to keep selling their products. And in this particular case, the Fed has implemented 11 rate hikes since the pandemic started, in March of 2022.
Now, this is a very simplified explanation of how inflation works, but they key thing to note here is that one of the biggest factors leading to mortgage rate increases, are the interest rate hikes that the Fed put in place. So given all of this, it’s clear now why the mortgage rate has sky rocketed in the last couple of years.
2) Housing Inventory
Next, let’s take a look at how housing inventory has evolved since the start of the pandemic – and got us to the point where we are now.
We have to remember first, that just before the pandemic shutdown, the housing market was at an all time high. Mortgage rates were low (about 3.40% in February 2020), and the economy was rising— resulting in a very healthy housing market where demand was steadily increasing.
And then, as mentioned before, when the country-wide COVID shutdowns came in March of 2020-nearly all of the corporate workforce were forced to work from home. We started our quarantining efforts, limited contact with the outside and stayed within the walls of our houses, for days at a time.
And at this point, most of us came to realize two really important things:
- Home Environment Is Crucial – we are spending an immense amount of time in our houses, so having a spacious and comfortable home environment is crucial,
- City Doesn’t Matter – since most of us can work remotely, it doesn’t actually matter what city you live in.
That led to what some have called the “Great Migration,” or “Great Relocation” – which was this phenomenon where nearly 56 million Americans started relocating away from densely populated metropolitan areas, to more suburban neighborhoods that allowed for more spacious and favorable living situations.
And as I mentioned before in the our inflation sidebar, this created a surge in home demand – outpacing the amount of home inventory in the market – leading to the drastic increase in home prices over the last couple of years.
Even home builders were struggling to keep up – in fact, many builders even stopped pre-selling their lots, because as soon as the home was built, the market would inflate with multiple offer scenarios – causing the home builders to leave money on the table. As a result, the housing market boomed and it was not uncommon to see 10-12 offers placed on almost every home listed by a realtor – with people selling and buying properties, on average, 10–15% above market value.
In the case of the city of Bellevue in Washington state, this one home sold for nearly $1M over asking price. That’s how unbalanced the supply and demand of the housing market was.
So where does that leave us now, at the end of 2023?
Well, the consensus among real estate analysts is that the demand is still high, but the market is definitely cooling down. It’s exhausting trying to compete for a new home with 10-12 other buyers and given the high mortgage rates right now, buyers are starting to sit back on their hands, delaying their home purchase decisions or even reconsidering them altogether.
To give you a quick picture of the impact of the mortgage increase over the last 3 years – take a look at this online mortgage calculator that lets you compare 2 different mortgage scenarios.
Let’s start by assuming you want to take out a $350,000 mortgage for a new home.
For scenario one, let’s say you got into the home just before the start of the pandemic at a low interest rate of 2.8%.
For scenario two, let’s say you purchased a home just this past month, in September of 2023, with an interest rate of 7.5%.
In this comparison, if you bought your home 3 years ago, you would be paying about $1,000 less each month for the same home, and over $360k less over the lifetime of your 30 year fixed loan. What this essentially means is that if you buy your house now, you would be paying double what the cost of your home is (compared to buying before the pandemic), due to the difference in the mortgage rate.
So in light of this, demand has definitely slowed, but because inventory is still so low in the market right now, we continue to see multiple offer scenarios on home listings – as this one CNN business article explains.
3) What to do if you’re in the market right now?
So that leaves us with the final question of, what do you do, if you are looking to purchase a new home right now? How can you make the best of this challenging housing market?
Well, there are 3 things you can practically do in this situation.
a) Wait, if you can
According to this Business Insider’s article on mortgage rate predictions, several leading institutions in the housing market are forecasting that there would be a slight drop in interest rates in 2024. Fannie Mae, MBR and NRA all predict that mortgage rates would decrease to around the mid-to-low 6% range by the end of 2024.
So, if you can afford to rent or stay in your current home for a while longer, this might be a good option.
b) Buy mostly in cash, if you have the means
The next option, if you have the means, is to try to buy a home mostly in cash. The less money you have in a mortgage, the less interest you pay. So if you’re fortunate enough to have a large savings balance, or have stocks that you’ve been holding onto, that you can sell to place a really large down payment on a house – then doing that, would help you avoid paying exorbitant amounts of interest on a large bank loan.
c) Buy now, refinance later
And lastly, you could just bite the bullet and buy a home now – hoping to refinance later on, when the interest rate drops. Refinancing a mortgage does cost money (typically about 3%-6% of the loan amount in the mortgage, in closing costs) but it would be one option to get you into the home you want now, while giving your the ability to reduce the interest costs later on.
There is certainly not an easy answer to this topic but whatever course you take, just remember, that a house should be a home first, and an investment second. And what I mean by that is – always keep in mind, the quality of life and the level of satisfaction and happiness that you’ll experience in your home, and make that one of the top priorities when choosing a house to buy.
If you’ve found the perfect home for you and your family, then do what you can to secure the purchase of that home, regardless of the state of the mortgage rate. Don’t let financial optics get in the way of providing the right home for your family.
Even if you purchased at the wrong time, at the wrong interest rate, it doesn’t matter – if you and your family are happy in the home that you live in.
**** Disclaimer *****
The content here is strictly the opinion of Daniel’s Brew and is for entertainment purposes only. It should not be considered professional financial, investment, or career advice. Investing and career decisions are personal choices that each individual must make for themselves in accordance with their situation and long term plans. Daniel’s Brew will not be held liable for any outcome as a result of anyone following the opinions provided in this content.