The month of May has come and gone, yet spring buying season may go bust completely.

Mortgage rates increased by 15 basis points during April despite existing and pending house sales slowing during March. While median existing home sales prices edged lower year-over-year for two consecutive months – an encouraging sign for home shoppers- statewide price declines are unlikely.

Price increases are caused by tight MLS real estate inventories, leading to affordability problems among many new homebuyers and current homeowners. One reason may be the limited housing inventory throughout the nation, as people have purchased homes with historically low-interest rates recently.

Though home prices haven’t fallen as precipitously as they did earlier in 2022, how far their value drops will vary will depend upon current housing market trends and regions with mortgage rate adjustments.

Housing Market Forecast for May 2023

Buyers and sellers appear to be in an impasse as spring homebuying season arrives. Mortgage and home price volatility, inflation fears, economic slowdown concerns, and fears about an imminent recession deter potential home buyers.

On May 3rd, the Federal Reserve raised its key interest rate by one-quarter of one percentage point – in line with what most housing experts had anticipated – which aligns closely with predictions made by experts on housing. If inflation remains at low rates throughout the year, rate hikes might be postponed until next year’s end; but any rise could have some indirect effect on long-term home loans such as 30-year fixed-rate mortgages.

It has also exerted undue strain on the housing market, which remains unstable.

On the one hand, homebuyers were provided with positive news when median home prices decreased 0.9 percentage points year-over-year to reach $375,700 in March, as reported by NAR (National Association of Realtors). This marked another month where year-over-year house prices declined after 13 consecutive months of record increases.

According to NAR data, total existing-home sales declined 2.4 percent year-to-date and have seen a 22% annual decline from February through March, according to real estate agency figures.

Lawrence Yun, the chief economist of NAR, stated in a study: “Home sales have attempted to recover and are highly sensitive to changes in mortgage rates,” while at the same time, many deals between homebuyers and starters for sale have become quite regular, which suggests more homes may be needed in order to satisfy demand – this indicates there may be distinct housing markets present.”

Experts Predict Sluggish Housing Market Recovery

After several weeks of decreasing mortgage rates during March and April, rates began rising again, with 6.43 percent attained during the week ending April 27th, according to Freddie Mac. Since that week ended on May 18th, they topped out at 6.39.

“Conditions like today – with increasing mortgage rates and home prices amid limited inventory – could cause long-term market fluctuations with some ups and downs on its path,” according to Danielle Hale, chief economist of Realtor.com, in an email announcement.

One such bump involves new rules on mortgage fees imposed by the Federal Housing Finance Agency (FHFA). Effective May 1st, conventional loan borrowers who put down 5 to 25% must now pay higher loan level price adjustments (LLPAs). Borrowers who are less than 5% down must continue paying regular rates with loan-level price adjustments (LLPAs).

Though Biden-Harris has modified mortgage fee rules to make homeownership “more attainable and affordable for more low and middle-income borrowers,” certain experts in housing have voiced objections as higher costs could cause greater hardship among more vulnerable borrowers.

Though modifications to mortgage fees remain uncertain in their effects on homeowners, mortgage application is currently at a very low rate.

Joel Kan, Vice President and Deputy Chief Economist for Mortgage Bankers Association, reported that both traditional and government-backed home loan applications for purchases increased over the last week. Yet, activity levels remained just 28% below year-ago levels.

Yet, some analysts remain optimistic about an eventual recovery process.

Sam Khater, the chief economist, stated in a press release: “The 30-year fixed-rate mortgage increased slightly week over week; however, inflation deceleration should cause interest rates to gradually decline through 2023,” concluding: “Borrowers looking to purchase homes should find lower mortgage rates welcoming.”

Housing Inventory Forecast for May 2023

Following the housing crisis of 2008, home construction numbers declined and are not projected to fully recover until 2023.

Housing market stability at or close to historic lows has helped drive increased home buying demand and price appreciation compared to past downturns, leading to higher home values overall.

“Inventories have fallen by about 46% below their historical average since 1999,” according to Jack Macdowell, Chief Investment Officer and co-Founder of Palisades Group.

According to NAR, sales remained stagnant, and demand remained subdued; inventory that had yet to sell in March remained static at an unbroken 2.6-month supply. Though up from 2.0 months last year, this level is still considered low by historical norms and given current economic realities.

Experts see little hope for inventory to return to normal anytime soon, given reports showing 8 out of every 10 homeowners with mortgage rates lower than 6 percent hold loans with rates less than this threshold. Many believe it unlikely that inventory problems can be fully addressed before 2023.

Housing Starts Forecast 2023

However, homebuilding shows signs of optimism. Single-family home construction grew for two consecutive months in March by an increase of 2.7 percent, while permits issued were up 4.1 percent from the prior month, according to US Census and HUD reports.

Recent statistics on builders also signaled optimism for this sector of the economy.

Recently, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which measures builder sentiment, improved by one percentage point from 44 to 45 – marking four monthly increases over 12 months of declines.

Still, builders’ confidence remains low – an optimism score of 50 or higher indicates more builders feel optimistic about the future. Recent increases point towards positive trends for home construction: Demand for new homes rose 9.6 percent year over year during March, likely due to reduced mortgage rates coupled with tight inventories of existing properties.

Furthermore, the Federal Reserve does nothing to alleviate inflationary trends with its aggressive rate hikes. At an open meeting of the Senate Banking Committee last November, Chair Jerome Powell of the Fed raised questions regarding its aggressive monetary tightening measures as part of their attempts to control rising inflationary trends.

Powell made this admission during a discussion meeting with Senator Raphael Warnock (D-Ga), acknowledging that increasing interest rates will raise firms’ borrowing costs for building homes while raising financing and production costs for suppliers; it will also discourage homeowners with low fixed-rate mortgages from selling their houses for a profit.

“Homeowners, homebuyers, lenders and builders all face uncertainty regarding interest rates, home prices, supply/demand imbalances, and any possible Federal Reserve-induced recession,” Macdowell warns. As such, builders might hesitate to start projects which bring necessary housing products into the marketplace.

Will the Housing Market Crash This Year?

Owing to an inventory shortage that has driven home prices higher, economists predict that the housing market may stabilize from recent double-digit percentage increases rather than collapsing abruptly.

Recent data from S&P CoreLogic Case-Shiller Home Price Index shows a modest month-over-month rise of just 0.2% after seven consecutive monthly decreases;. However, year-over-year rates are increasing slightly, and price growth has become slower.

However, experts report that whether home prices rise or decrease over the coming years depends largely on where they reside in each region. Austin, Texas; Phoenix, West Coast metro areas could all experience decreases.

Yun noted that home prices continue to climb in regions with an increased employment base and affordable housing; more costly areas across the nation, however, have experienced gradual decreases.

Furthermore, some experts agree that homeowners today stand on stronger foundations than before the financial crisis, many having equity-positive homes, so the chance of another crash in the housing market is very slim.

“Homeowner equity levels have reached record-setting highs over the years, meaning homeowners realize a considerable value in their properties,” states Nicole Bachaud of Zillow’s Economics team.

Under normal market crash conditions, home prices would typically decline 20-30 percent, and sales considerably decrease far more than is currently happening. One telltale sign of a market crash would be an uptick in foreclosures that have not yet occurred.

Macdowell assigns a low risk for housing market crashes 2023 due to mortgage defaults, foreclosures, and forced property liquidations as potential triggers of such events.

Recession remains an unknown factor for our economy.

“Macdowell believes the most serious threat to near-term market and housing market performance lies with potential severe recession or prolonged stagflation,” as per his assessment.

Will There Be Many Foreclosures in 2023?

Although foreclosure rates remain lower than pre-pandemic levels, foreclosures have slowly increased since September 2021, when the Covid-19 mortgage moratorium expired.

According to property information provider ATTOM, foreclosure rates increased 6% year over year in 2023’s first quarter versus the previous year and 22% year on year versus the initial quarter of 2022. Furthermore, March saw foreclosure rates surge 10% over the year while rising 20 percent between January and February alone.

“ATTOM has observed an unfortunate surge in foreclosure activity due to multiple factors, including rising unemployment rates and filings progressing through after two years of government intervention, as well as other ongoing economic pressures,” explained Rob Barber, Chief Executive Officer.

Although foreclosure rates have increased recently, Barber noted that homeowners’ accessing considerable equity should serve to curb this upward trend of foreclosure rates.

When Should I Buy My Next Home in 2023?

House purchases in any market should always be treated as personal decisions. Being one of the biggest single purchases most will ever make in their lives, it is crucial that investors be in sound financial condition before embarking on this purchase decision.

Use a mortgage calculator to estimate monthly housing costs depending on your down payment amount and interest rate.

Predicting what could occur this year when buying a home can be futile. “Buyers who wait in hopes that prices may decline may end up disappointed,” warns Neda Navab, president of Compass Real Estate Technology Business’s United States region.

Navab anticipates that home prices in hot markets have experienced some decrease over the past several years; however, she doesn’t anticipate an abrupt and sustained decrease similar to that seen after the 2008 financial crisis.

Experts advise avoiding cheaper home prices in favor of purchasing one based on your financial plan and requirements. When you find an ideal house that suits both aspects in terms of location and financing needs, that could be exactly the perfect house. Otherwise, making sacrifices to purchase can cause buyer’s remorse, forcing you to let it go altogether.

Tips To Consider When Navigating Today’s Housing Market

As prices drop, but your desired location for house hunting remains out of your budget, you must remain willing to be flexible in your approach to buying.

“Millions of Americans have done just this already, and you may want to consider moving to lower-priced housing markets if that interests you,” suggests Robert Frick of Navy Federal Credit Union’s corporate economist department.

Make sure that all of your ducks are lined up before deciding to review your financial position and examine multiple lenders, gather documents necessary for underwriting loans, and strengthen your credit rating before making decisions quickly and making offers in this highly competitive housing market. That way, finding your ideal house will become much simpler!

Frick emphasizes the need to come prepared. “Only buyers with their finances sorted, an understanding of their budget, and continuous monitoring will succeed in today’s highly-competitive housing market,” Frick claims. He also states that knowing exactly what the monthly payment, including taxes, should be part of your overall plan and determining whether this fits into it seamlessly.

Tips for Selling in Today’s Housing Market

As prices decline, it may still be beyond your means to secure the home you want; thus, being prepared and open-minded is essential when purchasing the property.

“Millions of Americans have already taken this route and find lower-priced housing markets more suitable,” notes Robert Frick, corporate economist of Navy Federal Credit Union. “Considering such options may help if home ownership remains out of your grasp.”

Make sure that all your documents and finances are organized well ahead of time – examine your financial position as well as gather all required paperwork; shop multiple lenders to enhance your credit rating – so when the perfect home appears, you’ll be prepared to act swiftly against the competition in a fast-moving market.

Frick states, “In today’s highly-competitive real estate market, only those best prepared will find success, such as those with financing arranged and an understanding of their budget will achieve success,” and advises buyers, “To be successful, be aware of exactly how much your monthly payment including taxes is going to be and whether that fits into your financial picture comfortably.”