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Key Factors Affecting the Real Estate Market Going into 2023

The real estate market over the last few years has been exciting to watch. Many people jumped at the opportunity to buy a new home, as the real estate market saw some of the lowest interest rates in history. Now, as we start 2023, here are some key factors affecting the real estate market and why now is the time for pencils down. 

What do I mean by Pencils down? 

Pencils down means wait, watch, and learn. It means dont make any big decisions right now because the market is changing quickly. Now is not the time to buy, or sell, but really a time to play the waiting game and see how the market transforms in 2023. So why should we have our pencils down? Let’s dive deeper into current market trends and what we are expecting to see this year.  

One of the key factors affecting the real estate market right now and causing this disruption? Falling Prices.  

Home values are dropping in both residential and commercial properties. Some markets are seeing a drop in prices as low as 20% year-over-year. What does this mean? It means that since the housing price peak of June 2022, the value of homes has continued to fall, rapidly. 

What key factor is causing this drastic drop in the real estate market? Well, home prices are falling rapidly in response to the increase in mortgage rates. In September 2022 alone 17% of contracts were called off. That means over 60,000 deals were broken and retracted for various reasons. A large portion of these canceled contracts was in direct response to the jump in mortgage rates. 

Since March of 2022, mortgage rates increased six times as the Federal Reserve tried to tackle the ongoing inflation issue. These rising mortgage rates are affecting the real estate market by decreasing the number of buyers in the market and applying more pressure on sellers to drop prices in an effort to make the sale. Ultimately, the supply is higher than the current demand, forcing houses on the market to sit for great lengths of time or drop their price to encourage a buyer to buy.  

So, why is this happening? Simply higher borrowing costs. Higher borrowing costs are another one of the key factors affecting the real estate market and causing these falling prices. Buyers are starting to focus on the total cost of their purchase; how much is their investment going to cost them and ultimately asking themselves, does is cash flow? 

Federal Reserve Chairman Jerome Powell confirmed that smaller interest rate increases are likely ahead. Until they see real signs of progress emerge on reducing inflation, these increases will continue. The continued increases in interest rates will continue to drive home prices down as they drive mortgage rates up.  

What does this mean for the 2023 Real Estate Market? More increases are coming! 

The reality is we are in the third inning of a nine-inning game. Sales are down in real estate and have been down for months, a trend that is likely here to stay through 2023. We will most likely continue to see rate increases during many of the upcoming Fed meetings of 2023. Since the start of the increase in March 2022, every increase has received unanimous consent. 

The Federal Reserve is responsible for maintaining a rate of 2% for both employment and inflation, and we are currently sitting at a 7.7% inflation, we have quite a long way to go before getting this to a level of comfort. These increases are going to be a huge factor affecting the real estate market in 2023. 

Secondly, sellers will have a wake-up call. Currently, we havent seen too large of price decreases in most markets. This is because sellers are holding out waiting for the storm to pass. As 2023 rolls around, more inventory will come to the market. This is going to put more pressure on sellers to lower their prices in order to make the sale. If you are a buyer right now, be patient.  

So, What are the Four things you should be doing/watching in 2023? 

1.Foreign Buyers/Strong    Dollar: Foreign investors will look to the US because the economy is strong; pay attention to how these foreign buyers affect the real estate market. 

 2. Acquire properties with fixed debt. This is an excellent way to minimize your borrowing costs. Acquiring an asset with a fixed debt is a great way to benefit from inflation. 

3. Cash is King; make sure you have an ample cash reserve. 

4. No Defined exit: Make sure you dont have any of these in your portfolio. Defining an exit by using managed money is what is going to get a lot of syndicators and investors in trouble in the coming years. Keep an eye on higher cap rates; these are rising because interest rates are rising. If you have a defined exit, and your cap rates continue to rise, you might not be able to get out of this investment quickly enough. 

 

Until Next Time, 

Ken

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