2023 Real Estate & Finance Market Predictions | Have We Reached the End of the Line?

One year ago Michael Perna made eight predictions regarding what would be seen in the 2022 real estate and financial markets. Six of them turned out to be right on the money, one started out on the right foot before taking a turn, and one - well he was completely off. Now Mike is back with eleven more predictions for 2023! Will he keep up his winning streak or will 2023 throw us all a curveball? For that answer, only time will tell.

2022 brought a lot of change to the markets with real estate cooling off significantly in comparison to the previous year and many stock values taking a hit. 2023 is also shaping up to hold quite a bit of change in store - some for the better, some not so much. Read on for our top predictions of the year.

Home Values Will Fall

Its no secret that home values have skyrocketed over the past couple of years with many Michigan homes gaining as much as 32% in equity. This is fantastic for current homeowners, but has also caused many of those seeking to purchase a home to either look at purchasing a cheaper home, or to be pushed out of the market entirely. In 2023 we could see that change.

Top economists at Realtor.com are predicting as much as a 5.4% increase in home values in 2023, while the research firm KPMG is predicting home values to decrease 20%. This 25.4% spread between the most optimistic and pessimistic is quite a gap leaving many wondering what will actually happen in the year ahead. 

According to Michael Perna, while it is possible to see a 20% fall in some areas on a national level, here in Metro Detroit we will see a decrease in home values of 10% to 15%. This of course is area dependent, where more desirable areas with home values at or above the current Metro Detroit average of $306,00 likely see a more temperate fall of 8% to 10%. The outliers here are luxury homes, which may be hit a bit harder. This may not be the news that homeowners were hoping for, but given the meteoric rise of values since the beginning of the pandemic, everyone will still come out ahead in the end.

     

Interest Rates Will Decrease

In their pursuit to lower inflation, the Fed hiked interest rates several times in 2022 resulting in the real estate market to slow significantly during the last half of the year. The lowest average interest rate of 2022 for a 30 year fixed mortgage was seen in January at just above 3%, which gradually climbed throughout the year before peaking at over 7% in the third quarter, then dropping back down to end the year at a little below 6.5%. 

It is Mike’s prediction for 2023 that interest rates will remain high in the beginning of the year, with rates climbing back up to between 7.5% and 8%, but only for a short time. As we progress through the year rates will begin to come back down to 6% by the end of 2023, about 5% by the end of 2024, and should settle in at roughly 4.5% for the foreseeable future afterwards. However, the 2024 election could have a large impact on where rates do settle. Be sure to stay tuned as Mike will provide more insight on this in the future. 

 

HELOCs Will Explode

Another side effect of the record high inflation rates we have been experiencing is Americans racking up credit card debt at an astronomical rate. As goods have become more expensive many families have unfortunately had to rely more on using credit to afford everyday needs. This has led to a huge increase in the total debt balance for U.S households, shooting up at a rate not seen in almost 15 years. While the vast majority of homeowners have gained a tremendous amount of home equity, they simply cannot afford to refinance their homes to unlock those funds. 

As of right now 70% of U.S. mortgages are currently financed at a rate of 4% or below, so refinancing at today’s current rate would greatly increase their monthly payments. Based on the average mortgage size of $231,000 (per Credit Karma), a homeowner refinancing today without taking a single penny out of their home equity would increase their monthly payment from $1033 per month up to $1454 per month not including taxes and insurance. Taking out an additional $30,000 to pay down any debts would bring that monthly payment up to $1643, or a $600 increase in their monthly payment. By taking out $30,000 on a home equity line of credit (HELOC) however is only $190 per month, which saves nearly $5,000 per year.

Due to this, Mike is predicting that in 2023 we will see four times the amount of HELOCs issued in comparison to those seen in 2022 with an average amount of $40,000 to $50,000. While this may save the average homeowner a lot of money versus a full refinance, this is not a good thing. Yes, inflation is and has been out of control, but our spending has also gotten out of control and it’s time to take a hard look at our necessities and cut spending where possible.

New Construction Will Decrease by 50%

Mike’s next prediction is that in 2023 we will see a 50% decrease in the amount of new construction homes being built versus the amount in 2022. 

Labor shortages and supply chain issues have already drastically slowed progress for new build homes, but with the uncertainty many home buyers have been feeling from higher interest rates in addition to demand for homes going down in recent months, expect to see production decrease by quite a bit more. Due to this, you can also expect to see many homebuilders begin offering some major incentives that buyers still looking to purchase a newly built home will want to take advantage of. 

These incentives will likely consist of one one or more of the following. First, a major incentive to watch for are interest rate buydowns in
the form of a 3-2-1 or 2-1 loan. There’s one major pro to this as it can greatly reduce your interest rate for the first two to three years, saving thousands of dollars in the process, but beware there are three cons to this type of loan as well, which Mike Perna will be covering in his next video. (Subscribe HERE so you don’t miss it!) If you do choose to take advantage of a 3-2-1 or 2-1 loan, you’ll likely want to refinance at the end of the two to three year discounted rate assuming that the standard rates have lowered since the origination date of your loan.  Second, price reductions on homes already listed on the market or at least 80% completed will likely be a common occurrence as contractors need to be able to recoup the money they have invested in their builds. They may also offer upgrade incentives in the amount of 5% to 10% of the sales prices, such as better wood flooring, counters, cabinets, etc. Last, builders may reduce lot premiums. Typically, the best lots in a neighborhood (such as wooded, daylight basements, walkout basements, etc.) sell at a base price plus an additional premium price. With builders looking to move homes quickly, now is the time to push for a better deal on the lot itself, which can save tens of thousands of dollars off of the total for a new build. 

 

The Stock Market Will Begin to Recover

Anyone invested in the stock market already knows that we saw a pretty significant drop in the market’s value in 2022. The S&P 500 stock index, which is composed of the 500 largest companies in the U.S. and is widely considered to be the best indicator of how U.S. stocks are performing overall, also took a fairly substantial hit. Looking at recent years, the value of the S&P grew 26.9% in 2020, followed by an additional 16.3% in 2021. In 2022 its value fell by 25% at its lowest point, but recovered somewhat ending the year at -17.5%. While this certainly isn’t great, it is moving back in the right direction. 

The good news is that Mike is predicting that as we progress through 2023 and the Fed is able to make progress on lowering inflation & interest rates, we should also see some improvement in stock values recouping roughly 50% of losses experienced in 2022. Even better news is that this also puts the market in position to see some actual growth in 2024. As said by Morgan Housel in The Psychology of Money, It’s important to remember that “The stock market isn’t a short game, it’s a long game. Put money in incrementally and consistently over time all the time and don’t look at it.”

Inflation Rates Will Decrease

The out of control inflation rates have been a driving force in both the real estate and financial markets for the past couple of years. Horrible supply chain issues during the pandemic led to a huge outweigh of supply versus demand and we are now just starting to return to a somewhat normal supply chain. Furthering these difficulties, companies have largely overspent in the past 36 months while taking advantage of super low interest rates (resulting in more demand for supplies) along with an average wage growth of 11% over the last 3 years leading to more consumer spending. Of course this could only last so long and now the results are being felt and can be seen through the several increases of interest rates in 2022 and massive layoffs that have taken place within the tech industry and beyond. While inflation did remain high throughout 2022, making nearly every product from eggs to lumber much more expensive than anyone would ever like to see, there may be some relief on the horizon. 

If Michael is correct, between effects from supply chain leveling out and the Fed increasing interest rates we should start to see inflation drop slowly throughout 2023 landing somewhere in the 4.5% to 5% range, which is still a lot more than the “ideal” inflation rate of 1.8% to 2.2%.  This will also mean companies spending less, inevitably leading to more job cuts and a slightly higher unemployment rate of around 4.25% to 4.5%, which taking all things into consideration isn’t too bad.

 

         

Demand for Contractors Will Decrease

Between the labor shortage and numerous supply chain issues in the construction industry over the past couple of years, most homeowners have encountered long wait lists when searching to hire contractors for home repairs or improvements. This has been especially true for great contractors who stay in high demand. While this may also ring true for the first half of 2023, Mike believes that by the second half of the year it will be much easier to schedule a contractor to work in your home. That being said, if you have a large project in mind that you’ve been dying to get to, try to put it off for just a few more months. As demand for contractors decreases and their schedules begin to clear up, they will likely start offering their services at cheaper rates as well. So if you have a large job to be done, you could end up saving a nice chunk of money by waiting.

The Crypto Winter Will Continue

Ok, so Mike was WAY off on his prediction regarding Crypto for 2022 in thinking values would drastically increase, but for 2023 he is singing a different tune. Unlike the White Walkers from Game of Thrones, Crypto Winter is a real thing and is currently in full effect with Cryptocurrencies all losing a TON of value in the volatile 2022 market. 

Here in 2023, Mike is predicting that Crypto Winter will continue, but only until regulation happens which is believed to happen before the end of the year. Whether it’s the regulation needed is yet to be seen. Between CEO Sam Bankman-Fried and the collapse of his former cryptocurrency exchange company FTX losing over 8 Billion dollars of its customers’ money (along with Sam’s 16 Billion dollar fortune), among others, it’s simply time for the government to start taking steps towards regulating the crypto sector. If and when that happens, we will likely see some of the larger cryptos such as Bitcoin and Ethereum recover from their losses, but only by 15% to 25%.

Pro tip: Play it safe by investing in what you know. If you are going to invest outside of markets you’re knowledgeable in, only do so in small amounts. A lot of people jumped into crypto as it was gaining in popularity (and value) which is totally understandable. And to be fair, some people made A LOT of money in doing so. Unfortunately, a lot more people probably jumped in not knowing much about crypto and many of those people lost the majority of their investments. 

 

Luxury Home Sales in Michigan Will Decrease Drastically

Luxury home sales in 2022 started off with a bang as Mike had predicted with an annual increase of 15% in sales versus 2021, but as interest rates climbed during the year, those sales tapered off and then fell at a fairly sharp decline. For this same reason he is predicting that in 2023 luxury home sales will decline and do so drastically at a 30% decrease of $1 Million dollar and up homes. Price reductions will also be more common on luxury homes in 2023 than were seen in 2022.  

Due to the increase in interest rates alone, in just six months the monthly payment on a $1.5 Million home has jumped from $4,800 up to $7,500 per month, or over $30,000 more per year for the same home. Of course, maintenance and energy costs have also increased, making it much more expensive to purchase and own a luxury home in today’s market. While some may argue that those who earn or have enough money to own a luxury home don’t have to worry about a larger payment, surveys have shown that this income sector is actually more worried about layoffs than any other income group. Many people who fall into this category are also business owners and with the skyrocketing costs to own and operate a business in combination with fears of a pending recession, the majority of luxury buyers are choosing to wait things out before making any unnecessary financial moves.   

Rent Princes Will Remain High

Like home values, rent prices have also gone up astronomically over the past two years, spiking at more than a 30% increase. In the last half of 2022 rent prices did plateau and began dipping down between 3% to 5% in some areas, which is great news, however we aren’t out of the woods yet. It’s Mike’s prediction that rent prices will probably increase overall, but not necessarily from prices today. Those most affected by this increase will be renters who will be resigning their lease that originated a year ago or more for the same property. In that scenario, renters can expect to be paying up to 10% more per month than in 2022.

     

FHA and Va Buyers Will Dominate the Market

During the pandemic at the peak of the housing market multiple offers, and highest and best offers stretching far above a home’s list price was a common occurrence. In fact, in 2021 the average amount put down on a home by buyers was 13%, much higher than average and largely in part to buyers needing to bridge the gap between a home’s appraised value and the dollar amount offered. Conventional loans were almost required to stand a chance of winning the bid on a home, which many still fell to buyers with cash in hand. If a buyer was only qualified for a FHA or VA loan, they were largely overlooked on any offers submitted. Those days are officially over. 

Michael Perna’s final prediction for 2023 is that with the reduced competition for homes, FHA and VA buyers will dominate the market. Above asking price bids will largely be a thing of the past, along with free seller occupancy. The average down payment is also anticipated to drop to 7% to 8%. While FHA and VA loans will once again become more widely accepted, it will of course come at a cost due to the much higher interest rates. Because of this, many buyers will likely be taking advantage of 3-2-1 and 2-1 loans to knock as much as 3% interest off of their loans that first year. But that’s a different topic for a different day, so stay tuned!

 

While both the real estate and financial markets will likely face their own challenges in the upcoming year, we are overall heading in the right direction. Inflation rates desperately need to be reduced to make everyday life more affordable for the average American, which will also lower interest rates in the process making larger purchases more affordable. The stock market will bounce back as it always has and will eventually move out of the red and turn a profit. Most importantly, life will go on.

To keep up with the latest monthly real estate and financial market updates, be sure to SUBSCRIBE to our YouTube channel. There you’ll also find exciting things to do in Metro Detroit, inside looks at local communities and much more!
Posted by Michael Perna on
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