In case you missed this bit of news, the Federal Reserve has jacked up the fed funds rate. This has caused mortgage rates to increase dramatically in the last six to eight months. With the higher rates, we have seen “a shift” in the real estate market. I am going to call this shift, a flight to quality. And, that will be the theme of my 2023 market forecast.
I rarely make market calls stating that we’ll see either more or fewer homes sell in any given year. Nor have I hazard a guess as to the direction of pricing. There are smarter people than I on this planet, and they typically don’t even get it right. But, here’s why I’m going to give the prediction game a try.
What we will see in 2023 is more of the same that we saw in the back half of 2022. The crazy market we experienced at the beginning of the year faded away like warm spring weather. As the year carried on, we are now left with two situations:
- More cautious buyers, whose cost of funds has spiked sharply.
- Limited inventory that can’t meet the even dampened demand in most price points.
Subsequently, I can say with great confidence we won’t sell houses in 2023 at the pace we did in the spring of 2022. Because of this, we are experiencing a flight to quality. Here’s what I mean by this:
A flight to quality in properties.
In 2023 we will see a flight to quality in the homes that trade hands. The market will remain strong for tried-and-true home styles and locations. The homes located in desirable streets and neighborhoods will continue to secure buyers. But, the B-minus or C-plus properties will find the market more challenging. The new cautious buyer seems to be steering away from the homes that show some risk. This could be a fixer-upper or a home in an emerging neighborhood. If a home gives a buyer pause for whatever reason, they tend to sit on the market longer.
A flight to quality in brokerages.
In the go-go days of the recent past, we saw a lot of new names appear on the real estate brokerage scene. Fueled by a flood of venture capital money funding all sorts of things in the real estate industry, we saw new brands hit the market. With the potential of a slowdown in transaction volume on the horizon, some of these shiny new firms will be forced to cut back their spending making them glimmer less to agents. This will cause a shift in where agents choose to affiliate. In the coming year, I believe agents will shift to more profitable boutiques where the company’s value proposition aligns more closely with the agent’s goals.
A flight to quality in lending.
As we move into 2023 the flight to quality will also happen in lending. With higher interest rates (and a seemingly endless array of mortgage products), 2023 will bring us loan packages that favor buyers with high credit scores and large down payments. Lenders will trip over themselves for the quality buyers, and the lower-end buyer may have a harder time qualifying for a loan due to their perceived risk. If the average days on the market for homes increase, then lenders may tighten their lending standards in an effort to reduce risk.
In the end, my a flight to quality 2023 mantra will bear a more balanced market, where supply and demand are closer than they have been in recent years. This will be good for buyers who will not have to deal with nutty multiple-offer scenarios. As for sellers, it may take more time to sell.
In the end, the market is mirroring pre-pandemic conditions where it took experienced professionals who are creative, hardworking and possess strong marketing skills to successfully help their clients sell a home.
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