The 2023 housing market is a labyrinth of unpredictability. Despite the Federal Reserve’s rate-hiking campaign that kicked off in March 2022, the housing market’s traditional response to such changes has been disrupted.
The Federal Reserve has hiked its benchmark interest rate by five percentage points since last March to curb inflation, which was at a 40-year high. This rise in interest rates has resulted in consumers facing higher costs on mortgages, credit cards, auto loans, and other forms of loans. In theory, this should lead to a reduction in consumer spending, which should, in turn, prevent businesses from hiking prices. However, the housing market has not reacted as anticipated. Despite ten rate hikes, the market remains unpredictable.
In recent times, mortgage rates have been increasing steadily and have reached their highest point for the year, with the average 30-year fixed mortgage rate standing at 6.81% for the week ending July 6. Surprisingly, despite these rising mortgage rates, home prices have not shown a corresponding decline. In May, the median price of an existing home was $396,100, which was a decrease of 3.1% compared to the same time last year. However, it was a 2.6% increase for the month of May alone. This positive trend marked the fourth consecutive month of price hikes.
2023 Housing Market
The housing market’s unexpected behavior can be traced back to a variety of factors. A key element is the lock-in effect, a consequence of the increased mortgage rates following the Federal Reserve’s rate hikes. When the pandemic first hit, the Federal Reserve drastically cut rates to near-zero to stimulate the economy. This allowed homeowners and prospective buyers to refinance or purchase at incredibly low rates, some as low as 2%.
Fed rate hikes will eventually 'crush' housing, 'interest rate-sensitive' markets: David Tawil pic.twitter.com/z2PMEABGmN
— Mornings with Maria (@MorningsMaria) July 7, 2023
However, with current mortgage rates nearing 7%, selling could mean relinquishing a low-rate mortgage for one that could potentially double. This lock-in effect has significantly contributed to a decrease in housing inventory. With many homes still listed at prices higher than their pre-pandemic values, homeowners have little to sell. As a result, housing inventory has seen a reduction of approximately one-third compared to pre-pandemic levels.
The current state of the housing market is still grappling with the aftermath of the Great Recession, which resulted in nearly a decade of slow-paced new home construction. The situation began to change in 2020 when mortgage rates dipped below 3%, prompting home builders to accelerate their operations. However, this increase in pace was insufficient to cater to the sudden surge in demand triggered by the pandemic.
As we look at the housing market in 2023, it’s clear that it’s a complex landscape shaped by a multitude of factors. These include interest rates, inflation, and the enduring impacts of both the pandemic and the Great Recession. To effectively navigate this unpredictable market, it’s crucial to understand these influences and their implications.
Airbnb’s Uncertain Horizon
Recent analysis indicates a significant decline in Airbnb revenues in several large U.S. markets, a trend that could potentially disrupt the entire residential real estate market. According to Nick Gerli, CEO of Reventure Consulting, the short-term rental market is undergoing a major restructuring, with Airbnb revenues falling by as much as 50% in cities like Phoenix and Austin. Other cities, including New Orleans, Seattle, and Orlando, have also seen a decline in revenues by at least 34%.
"Lots of people bought Airbnbs [and] deprived the housing markets of listings," says Reventure Consulting CEO @nickgerli1. "Now that bubble's collapsing." pic.twitter.com/yPW4WGSrM7
— Last Call (@LastCallCNBC) June 30, 2023
This downturn in the short-term rental market could have far-reaching implications. One potential consequence is an increase in housing supply, as Airbnb owners may be forced to sell their properties. This could lead to lower housing prices, potentially alleviating some of the housing affordability issues currently plaguing many parts of the country. However, Airbnb spokesperson Sam Randall has questioned the accuracy of Gerli’s numbers, indicating that the situation may be more complex than it initially appears.
In conclusion, while the decline in Airbnb revenues could potentially lead to a shake-up in the residential real estate market, the full impact of this trend remains to be seen. As with any market shift, the effects will likely vary from city to city and will depend on a range of factors, including local housing demand, the prevalence of Airbnb rentals, and the broader economic context.
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