Happy New Year!

It’s that time of year when I look back and count my blessings and express gratitude for the wonderful relationships I’ve formed over the past year and the business that has come from my past clients and friends.  

The process of buying and selling real estate is both exciting and overwhelming, and I am honored that you continue to choose me and refer me to friends and family.  The downturn in the market next year will put added pressure on many of you, but I am here to help you navigate the best scenario. 

Part 2: 2023 Chicagoland and National Housing Market Forecast

What Industry Leaders Forecast

houses next to an easel that has 2023 written on it

Dr. McMillen, UIC College of Business (Dept. of Real Estate)

Median prices are forecast to grow throughout 2023 within a lower and narrower range compared to 2022. By December 2023, the median price in Illinois is forecast to be $257,700 (up 3.5 percent) while the median price for the Chicago Metro Area could be $312,900 (up 5.6 percent on an annual basis).

Sales are forecast to experience mixed trends for both Illinois and the Chicago Metro Area. Statewide, sales will have negative growth in the first half of the year, but then shift to positive. In the Chicago Metro Area, however, there will be negative sales growth most of the year.

National Association of REALTORS® Chief Economist Lawrence Yun

Housing inventory is about a quarter of what it was in 2008. Distressed property sales are almost non-existent, at just 2 percent, and nowhere near the 30 percent mark seen during the housing crash. Short sales are almost impossible because of the significant price appreciation of the last two year.”

Yun has said he expects home sales to decline by 7 percent, while the national median home price will increase by 1 percent, with some markets experiencing price gains and others price declines. He also projects a strong rebound for housing in 2024, with a 10 percent jump in home sales and a 5 percent increase in the national median home price.

Darren Hale, Chief Economist, Realtor.com

After being overwhelmed in the housing frenzy of the recent past, homeowners, sellers, buyers and renters may be underwhelmed in 2023. The slowdown in home sales transactions that began as mortgage rates surged in 2022 is expected to continue, leading to a moderation in home price growth and tipping the housing market balance away from sellers. But with mortgage rates continuing to climb as the Fed navigates the economy to a soft-ish landing, the moderation in home price growth will not be enough for the housing market to be a buyer’s bonanza. Instead, homes shoppers will enjoy advantages such as a growing number of homes for sale, but costs remain high, challenging affordability at a time when overall budgets continue to be squeezed.

Freddie Mac Chief Economist Sam Khater

Mortgage rates have increased at the fastest rate in four decades, quickly taking the wind out of the sails of the housing market. Caused by stubbornly high inflation and higher mortgage spreads, the rise in rates has created affordability challenges that have forestalled many consumers’ decision to buy a house. As housing market activity continues to contract, we expect a gradual increase in the supply of homes available for-sale, as compared to historically low levels last year. The combination of much lower demand and higher supply will cause home prices to decrease during the next year.

Fannie Mae Economic and Housing Outlook

We forecast total existing home sales will be 5.03 million in 2022 and 3.90 million in 2023 before rebounding in 2024 to a pace of 4.60 million. With mortgage rates continuing to rise over the past month, (the 30-year fixed-rate mortgage was 7.08 percent according to the November 10 Freddie Mac survey) the full effects of rate increases on home sales have yet to be felt. Affordability measures are strained, which we expect will continue to limit home purchases by first-time homebuyers.

However, perhaps the larger effect on total home sales is a growing “lock-in effect,” which is the financial disincentive for existing homeowners with a fixed-rate mortgage that is well below current market rates to put their home on the market, move, and take on a new mortgage rate well above what they had previously. Our rather bearish outlook in 2023 for existing home sales – we are now projecting the lowest annual pace since 2008 – is in part driven by this dynamic.

My Prediction:  Overall Sales and Home Prices Fall 10%

The True Sales Price Netted by Sellers

Not mentioned by industry leaders is that interest rates quotes will now typically cost a “point” or 1% of the loan amount.  For example, today’s 30-year fixed rate mortgage for a single family is around 6.5%, but with a point.  It will be difficult to find a mortgage rate quote without a point being charged, whereas in the last 20 years rarely did lenders charge points in Illinois.  That 1% point is being passed to the sellers as a seller concession, so that on paper a seller making $500,000 is really netting $495,000.  

One big trend to keep an eye out for is temporary interest rate buydowns.  Sometimes called 3-2-1 loans, the lender charges 3 points (or 3% of the loan amount) to buydown the rate.  If today’s rate is 6.5%, the buyer would enjoy a 3.5% rate in Year 1, 4.5% rate in Year 2, and 5.5% in Year 3.  As the market turns buyer friendly, sellers will be asked to cover these costs, reducing their gross sales price 3%.  The concept was created by lenders and realtors in anticipation of the downturn:  buyers receive temporary relief from huge payments until rates eventually fall.   The issue I have is no one knows if rates will fall or when.

So median sales prices figures, in my mind, should include these seller-paid concessions.  Other closing cost credits will be negotiated by buyers also, to a maximum of 3% of the loan amount as allowed by lenders, which will also impact a sellers bottom line. Sellers will feel the pain this year or simply opt to stay out of the market, which in turn leads to less homes for buyers.

Lack of Options Leads to Buyers Riding the Fence (Permanently)

The lock-in effect is real.  Sellers with a 3% rate will not be induced to sell their home at a discounted price (especially after all those seller-paid concessions buyers will demand) only to buy a home at 6.5% unless they really need to.  One example I see if moving to another state for much better job.  In that case though, employers are helping cover losses and covering costs (plus the seller will receive a higher salary).

I have many buyers that started looking years ago when rates were only 3% but were leery of paying over super-high ask prices in multiple bid situations.  Guess how it looks now at 6.5%?   I figured out for a recent client that in order for his payment to be the same now as it would have been January 1, 2022,  the home price would have to drop $100,000.  This is in a nice area of Park Ridge- prices will not fall $100,000 (maybe $50,000).  

So the gap between what seller expected based on last few years and what buyer wants or needs is at all-time high.   Both will simply hit the sidelines unless necessity demands otherwise.

Prices Already Falling

The only sales that are happening is when the seller follows the list agent’s advice about pricing and “gets real”.  A recent South Loop buyer could find a wide spread in ask prices for the same size unit in the same building.  The unit they bought had an ask price of about 10% off the height of the market- and its not even 2023 yet. The other higher priced units will just sit there.  

Truth: No One Really Knows

I hope I am wrong about the market but early reports are bad.  Maybe some of the drop-off is seasonal?  Maybe rates will continue to improve as they have already by 1% after being at 7.5%  Maybe war in Ukraine will end?  Feds get inflation under control?

Whatever the case, I am here to walk you through your buy or sale and offer my 23 years of knowledge and experience to present the best options available for your situation.