Money Street News
Related Articles
Image source: Getty Images
You might spend less on a home than you did last year, but don’t assume homes will be inexpensive.
Key points
- Home prices are still up on a national level, but gains aren’t as strong as they were in months past.
- While you might spend less on a home this year than the past couple of years, that doesn’t mean you’re in for a bargain.
- Higher mortgage rates might also get in your way of buying a home.
There’s a reason so many buyers struggled to purchase a home in 2021 and 2022. Not only has housing inventory been very limited, but home prices have been elevated, forcing buyers on a budget to pull out of the market.
But home price gains have been slowing in recent months. And if that trend continues, buyers might get some relief — albeit limited — in 2023.
Home price gains are slipping
When we talk about a decline in home price gains, it’s important to note that sellers are still profiting on their listed properties. They’re just not profiting as much as they did months ago.
In October 2022, U.S. home prices rose 9.2% on an annual basis, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. But that was a weaker gain than what the index registered in September, when home prices rose 10.7% on an annual basis.
In fact, if we go back to mid-2022, we can see that home prices seem to have peaked in June, and that gains have been sliding ever since. If that trend holds up, buyers could end up in a stronger position to purchase a home during the latter part of 2023. But that doesn’t mean homes will magically go from being unaffordable to affordable within months.
Affordability issues could still persist
While buyers might get some relief with regard to home prices later this year, there’s the issue of mortgage rates to consider. Right now, buyers are looking at roughly twice the borrowing rate they would’ve locked in a year ago. And if mortgage rates don’t come down, many buyers might remain in a position where they can’t make an offer on a home.
We don’t know what direction mortgage rates will trend in this year, as that will hinge, at least to some degree, on how aggressive the Federal Reserve is with its interest rate policies. Last year, the Fed implemented a series of sharp rate hikes in an effort to cool inflation. And while the Fed doesn’t set mortgage rates directly, when it raises its federal funds rate, that tends to drive the cost of borrowing up across the board.
In December, the Consumer Price Index showed a nice dip in inflation compared to the previous month. That could lead to a slowdown in rate hikes, which might translate into relief for mortgage borrowers. But it’s a little soon to know.
Ultimately, those looking to buy a home will need to keep tabs on the housing market and pay attention to home sales, prices, and inventory. They’ll also need to keep track of mortgage rates and see what direction they trend.
As a general rule, buyers should aim to keep their monthly housing costs to 30% of their income or less. And that 30% limit includes expenses like homeowners insurance and property taxes — not just a mortgage payment. Whether housing market conditions and borrowing rates allow for that among more buyers this year is yet to be determined.
