AEI Predicts Housing Market Will Continue to Struggle Through 2023

By Scott Kimbler

Watch for housing sales in 2023 to follow the same pattern from a decade ago.

That’s the prediction of Ed Pinto, Director of the American Enterprise Institute’s Housing Center, during a recent data review. He and Assistant Director Tobias Peter used information from the final months of 2022 and into the first quarter of 2023 to preview the remainder of 2023 and perhaps even into 2024, given current market trends.

Pinto pointed out that Agency Purchase Volume for the final month of 2022 was down 45 percent from the same month in 2021 and 51 percent down from the same month in 2020.

“Based on Optimal Blue date,” Pinto said. “We expect purchase volume in early 2023 to continue to track the decade-old levels of 2013.”

Pinto sees problems developing for the mortgage market thanks partly to the Fed’s policy of increasing interest rates.

“Some additional headwinds have developed as mortgage spreads, which have been relatively wide for some time, continue to widen,” Pinto said. “Recently, the spread of the 30-year mortgage rate to the 10-year rate was the widest on record going back to the early 2000s. Just to give you an idea of how those spreads have widened, back in 2004, those spreads were about 125 basis points. Those were depressed because the agencies, Fannie and Freddie in particular, were not pricing their loan risks properly, they found during the financial crisis. Recently, that spread has been over 300. That explains, to some extent, why the rates today are so high as they are. Which is about 6.5 percent, and the Treasury Rate for 10 year are about 3.5 percent.”

Pinto also pointed to tailwinds pushing the market against the headwinds from higher interest rates.

“Those include historically low supply,” said Pinto. “Strong job numbers. We’re still at basically the lowest unemployment rate in basically 40 years. Low foreclosures. We just looked at the foreclosure levels; they continue to trade at relatively low rates. There’s a little bit of an increase, but that is relative to where we were pre-pandemic. We (AEI) always look very closely at FHA because that is where most of the high-risk loans are concentrated. But those seem to be performing at a historically reasonable fashion. Again, due to the very strong house price appreciation, we’ve had over the last literally 10 years. But in particular, since the pandemic began.”

He said when people were working from home five days a week, they had the opportunity to find less expensive housing farther out from in-town areas. Those numbers declined as the people began to work from the office two days a week. Now many employers want workers back at their desks three to five days a week.

“Price arbitrage opportunities continue to be quite strong,” Pinto said. “Our preliminary HPA (Home Price Appreciation) data indicates that home prices will remain solid. Demand still outweighs supply.”