The High Price of a Place to Call Home

The average median home price is currently at a historic high of more than $400,000. Inflation has reached a 40-year high. The Federal Reserve’s actions to counter inflation made 30-year fixed mortgage interest rates 6.29% for the first time since 2008 in September 2022. In some cases, borrowers faced mortgage payments as much as 70% higher than the same time the previous year when rates were still well below 3%. Some new homeowners now face monthly payments of $2,000 or more.

Although home prices in 2023 are expected to drop by 20% with sellers reducing their asking prices, sellers face a nightmare scenario in which they might not be able to find a new home at a reasonable price and all buyers face higher long-term costs. The mortgage-rate surge has placed many new 2022 homeowners underwater.

Per a Black Knight report in early December, 8% of all homeowners who took out mortgages in 2022, approximately 250,000 or one out of every 12 homes, can no longer claim that their homes are worth more than the cost of their mortgages. Another 10% or approximately 1 million buyers, nearly 40% with FHA/VA loans, can’t claim that they have at least 10% equity. Although these underwater numbers are still lower than historic highs, they point to a worrisome trend for 2023.

Low-Income Buyers Hit the Hardest

This question of “will foreclosures increase in 2023?” isn’t really a question at this point. In 2022, the number of borrowers underwater in October tripled when compared to previous periods with high home prices, poor inventory, low-income buyers, government-backed mortgages and low downpayments the most common factors. Many borrowers with 2022 mortgages have already become delinquent.

Changes with the economy and inflation make it harder for everyone to pay off their debts. The borrowers with high debt-to-income ratios have greater difficulty making timely payments or keeping up with payments at all. When the value of their homes plummet, they also have difficulty refinancing and obtaining the buffer needed to get them through lean times. As a result, they’re often the first borrowers to become delinquent.

To offset inflation in 2023, the Federal Reserve will undoubtedly increase rates, which means that more homes will lose value and more borrowers with high debt-to-income ratios won’t be able to make their mortgage payments. The sadly inevitable answer to the question of “will foreclosures increase in 2023?” with this type of scenario will always be “Yes.”

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After analyzing potential-existing home sales for June 2022, the sales rate dropped to a seasonally adjusted annualized rate of 5.47 million. This level is 2.5% lower than May’s rate and 13.1% lower than June 2021. The rate closely matches the June 2019 rate, the last same month’s sale rate from the pre-pandemic days.

Fleming added that the housing market outlook remains strong despite dropping from the astoundingly high rate observed during the pandemic. Many people are curious about why, and Fleming stated that looking at the fundamental market conditions that drive the potential existing home sales offers insight.

There are several fundamental measures that analysts like Fleming review. One of those measures is home buying power. Another way to describe this measure is how much home a buyer can afford based on their annual income and the current 30-year rate for fixed mortgages.

In June 2022, mortgage rates were 2.5% higher than in June 2021. Household income for the same period was constant. This lowered home buying power by more than $123,000. The estimated increase in household income for all of 2022 is 4.4%. While this will positively impact an individual’s home buying power, it will still result in a $108,000 loss compared to June 2021. Fleming stated that the decline in home affordability and buying power may have caused the loss of 522,000 potential existing home sales.

A second fundamental measure examined by Fleming is the standard of credit for issuing a mortgage loan. Lenders have tightened their benchmarks over the past few months. Increasing economic uncertainty and tighter federal fiscal policies may have cost the housing market outlook to lose 458,000 home sales.

Not all the fundamentals hurt the housing market outlook. Rising home prices deliver a positive impact. When homeowners build equity, they’re more likely to use it to buy a more significant or nicer home. If their equity is low, they feel locked into place. Low equity makes people stay where they are. The appreciation of home prices may have increased the potential home sales by 193,000 in 2022 compared to 2021.

The formation of more households in 2022 has also positively impacted the demand for existing homes. An estimated 43,000 potential home sales occurred in June 2022 compared to June 2021 due to newly formed households.

Homebuilders have boosted their rate of building new homes. The increase in new inventory has also given a lift to housing potential. When more homes are available, buyers feel more confident about selling their existing homes. The increase in newly constructed homes added about 1,400 potential home sales in June 2022 compared to June 2021.

While the 2022 housing market outlook differs considerably from 2021, it looks more like 2019. The return to pre-pandemic levels of demand, supply, and affordability provides hope and motivation to home buyers and sellers.

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How Might Current Mortgage Interest Rate Trends Help Buyers?

Since March 2020, it has been common for sellers to receive multiple offers on their homes on the day that they have gone on the market. This is partially because there has been a relative lack of inventory in most cities throughout the United States.

An increase in interest rates may mean that homes sit on the market for a little longer. However, buyers have also engaged in bidding wars because interest rates are at historic lows. Therefore, they can offer more for a home without going past their preferred monthly payment.

Ultimately, buyers won’t feel compelled to make an offer just because they’re scared that their dream home won’t be around if they wait. Over time, this may be enough to either push prices down or slow the pace of price appreciation in a given market.

Mortgage Interest Rate Trends Can Help Buyers Reassess Their Needs

Many savvy buyers knew that interest rates on home loans weren’t going to remain at or below 3% forever. Therefore, they may have been tempted to buy a home to lock in a low rate even if they weren’t ready to do so. As interest rates climb, buyers need to spend more time evaluating their financial situations before shopping for a home and a loan. This may result in a more significant number of buyers purchasing homes based on objective criteria instead of relying on their emotions.

Buyers May Have More Time to Evaluate a Home Properly

If mortgage interest rate trends continue their upward trajectory, they may gain more leverage during the transaction. Instead of agreeing to buy a home without any contingencies, it may be possible to add stipulations to a purchase agreement. These stipulations may include the right to inspect a home before the transaction closes, assistance paying closing costs, or help with the cost of any repairs that may need to be made.

Adding these stipulations may help buyers ensure that their prospective homes are in good condition and that they can close without incurring financial hardship. It may also be possible for buyers to make a purchase contingent on selling their existing home, which can help ensure that they can make a smooth transition.

Mortgage interest rate trends may make it difficult for some consumers to buy their dream homes. However, for some, taking a step back may be in their best interest. Furthermore, higher rates may make the market more competitive, which may provide those currently searching for a home a chance to find a deal that is more to their liking.

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