Against a backdrop of profound economic and social change brought on by the COVID-19 pandemic, the last two years saw historic home price increases and intense competition among buyers—fueled by historically low-interest rates and tight inventory. However, these recent trends are not expected to continue next year. If interest rates continue to rise and inflation persists, the real estate market will likely look decidedly different in 2023.
Stabilizing Home Prices
At the height of the boom in 2021, there were weeks when average prices were more than 20% higher than the same period one-year prior. This rate of increase slowed in 2022, and the most recent data shows that average and median sale prices are now virtually unchanged from a year ago in many parts of the Chicagoland area.
With higher interest rates softening demand, many expect prices to remain stable, with little to no increase in 2023.
2-1 Mortgage Buydown
With higher interest rates impacting buyers and a cooling market of concern to sellers, a 2-1 Mortgage Buydown can offer advantages for both. Here are the basics:
Paid for by the seller, a 2-1 Mortgage Buydown lowers the buyer’s interest rate by 2% in the first year and by 1% in the second year – before reverting to the original rate in year three and beyond.
At any point, the buyer can refinance if rates come down. If they refinance early, any remaining buydown funds are applied to the loan.
For the seller, a 2-1 Mortgage Buydown can make their listing more attractive. At a typical cost of 2.35% of the buyer’s loan, it can be a better (and less expensive) option for the seller than a price reduction.
How About Inventory and Competition?
Over the past two years, the number of buyers has far outpaced the number of homes for sale. This lack of inventory was a defining factor of the pandemic housing boom—and often led to bidding wars and multiple offers that left many buyers out in the cold. Looking ahead to 2023, a variety of conflicting factors will come into play.
Potential sellers who purchased or refinanced in the last few years have locked in a historically low-interest rate, and may be hesitant to list their home this spring if it means securing a new loan at a higher rate. With the number of new listings already trending downward compared with one year ago, the current inventory shortage is likely to continue next year.
However, higher interest rates will also mean fewer buyers, and many of them will have a specific need to move—perhaps driven by a job relocation or other life change. Although this points to a pool of highly motivated buyers, the bidding wars and multiple offers that defined 2021-22 are not likely to be as common.
So What’s Next?
Despite the challenges of higher interest rates and continued economic uncertainty, we expect to see opportunities next year for both buyers and sellers.
For buyers, stabilizing home prices present an opportunity to secure a new home at a more affordable price. While interest rates may currently be higher than in recent years, the option to refinance may present itself if mortgage rates decline, leading to an overall more affordable cost of living long-term.
For sellers, continued low inventory will naturally force competition amongst the serious buyers in the marketplace, ultimately helping homes that are priced competitively to sell faster.
We do not expect current interest rate and inflation concerns to alter historic market patterns. The usually busy spring season (February to June) will likely continue to see the highest volume. So whether you’re looking to list or purchase a home, now is the best time to contact your Dream Town real estate expert to set your plans in motion.