Here’s Why the Housing Market Won’t Be What You Think in 2023

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It’s funny how quickly we forget predictions that get it wrong. 

YouTube fans know Graham Stephan as a financial influencer. The real estate investor is particularly popular with young adults diving into the investment pool for the first time. Like every other financial influencer on the planet today, Stephan has weighed in on what he expects the housing market to look like in 2023.

Reading the tea leaves

Here are Stephan’s predictions for the 2023 housing market:

“We’re finally going to see the delayed effects from a slowing economy.”A combination of higher mortgage interest rates, weaker consumer spending, and continued layoffs will put pressure on landlords to hang on to their current tenants. This will delay rent increases as inventory piles up.Landlords will compete for a fixed pool of tenants, possibly driving rents down further.Home values will take longer to adjust than rent prices.There will most likely be a mild drop in prices in some areas, while homes in other, hard-hit areas may drop by 25%.

A historical perspective

According to Stephan: “The housing market in 2023 won’t be what you expect — whether you’re a buyer, seller, renter, or landlord. Home sales are down 35% — the biggest decline on record!

To understand this shift and what it means for you, we need to take a step back Way back to World War II.”

Returning servicemen and women

When World War II ended, the U.S. economy was lifted by a wave of veterans returning home. There was a problem, though. To help with the war effort, most economic activities had been put on pause. Now, there were millions looking for jobs that did not exist.

In response, the government kept interest rates low to promote both manufacturing and spending. The GI Bill was put in place to give these returning soldiers access to low-interest, zero-down-payment mortgage loans as well as a free college education.

Additional detail: It’s important to note here, the GI Bill was intended to help white soldiers acclimate to home and make their way into the middle class. Although more than 1 million Black men and women served in every branch of the armed forces during World War II, few were allowed access to GI Bill benefits. Segregation was still the law in 18 states, making it next to impossible for those returning service personnel to secure a mortgage or attend college.

Americans got married in record numbers, anxious to start families of their own. To ensure that there were enough homes, 7 million were built between 1945 and 1950. There were another 8 million added by 1955.

Today represents the flip side of the coin

Like peering into a mirror, we can flip what was happening in the years following World War II with what’s happening today. Stephan made these points, contrasting the differences:

After months of falling home sales, they dropped by another 35% in November 2022.In an effort to slow consumer spending, the Federal Reserve has steadily increased the interest rate. Not only did it slow the amount Americans were willing to spend on a car or vacation, but higher interest rates also slowed the number of people willing to buy a home.Median home values are 143% higher than they were in the 2000s, yet median incomes have not kept up.The number of recent layoffs in the tech sector has led to job insecurity, with people afraid they will lose their jobs.More people now live with their parents or share a home with roommates rather than buying a house of their own. This is the opposite of what happened after World War II.While returning veterans wanted homes to raise growing families, the size of today’s family is shrinking, which also shrinks the need for a new house.Despite a drop in housing sales, rents are slowly dropping. Nationally, rents fell by 0.59% in November 2022.Apartment construction recently hit a 40-year high, with more than 917,000 being built. These new apartments are expected to be ready for tenants by the second half of 2023, meaning there may be more units on the market than demand for those units.

Final thoughts from Stephan

“So what does 2023 look like? There are a lot of predictions, not all in agreement,” Stephan said.

It looks like 2023 is going to be one of those years we only understand when studying it through the rearview mirror.

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