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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But how does that impact a housing bubble crash possibility in 2022? You must watch five key areas influencing market stability: housing affordability, election campaigns, inflation, mortgage rates, and the pandemic.

The Housing Bubble Will Pop

Skyrocketing housing costs will inevitably come when potential buyers cannot afford to pay the still-climbing prices. Initially, Zillow and Corel Logic predicted back in 2020 that housing prices would start to fall, but so far, prices have continued their upward trend. With housing giants like Zillow and Realtor.com anticipating a 3% to an 11% price jump in 2022, forecasts are leaning towards shifting to a buyer’s market in 2023.

With 2021’s record-low home inventory expected to catch up to demand at some point in 2022, along with refilling supplies like timber and labor expected to normalize, new builds are expected to become more plentiful. Further adding to the likelihood that we will see the housing bubble in 2022 pop, home values are now over 1/3 higher than in 2005, just before the last housing bubble.

Eyes on 2024

While midterm elections are just around the corner, the 2024 presidential election may impact the housing bubble in 2022 just as much. Traditionally suitable for buyers, election years can show a drop in housing prices of up to 15%. But consumer confidence can stagnate when presidential outcomes are uncertain, affecting the housing market negatively by slowing down potential purchases.

Rising Inflation

The most impactful economic influence on the housing bubble in 2022 popping is the record-breaking inflation rates affecting goods, services, and gas prices. Inflation has continued to rise despite the Fed’s money-printing plan to slow it down, so the Fed is now rumbling that they will be aggressively hiking mortgage rates to gain control of inflation. The market will feel the effects in one to three years, putting 2023 squarely in the sights of seeing a downturn in the housing market.

Mortgage Rate Hikes

Millennials and other first-time buyers have continued to find the housing market out of reach with sky-high mortgage rates and home prices since 2021. The housing bubble in 2022 may pop when 2023’s anticipated higher home inventories and the anticipated reduction in price appreciation kick in.

Pandemic Fallout

The housing bubble 2022 continues to feel the effects of the pandemic even with clear improvements in the economic factors that influence the market. The unemployment rate has rebounded to 5.4% from 2020’s record high of 14.8%, and consumer spending is up as well, both contributors to a strengthening housing market. But Fannie Mae has predicted that the 2023 economy will be entering the “mature stage of the business cycle.”

Since there are fewer anticipated buyers in the coming year and a labor market that is essentially back to work post-pandemic, the continued labor shortages in many industries are expected to remain. The pandemic saw many city-dwellers snapping up homes outside of the cities since remote work became the norm. But with reduced remote work opportunities as businesses are increasingly bringing workers back into the office, the housing market may see higher inventories return with many of those properties hitting the market again.

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