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Financial Fundamentals

*Is the Housing Market Going to Crash in 2023?**

Alexandra Ardelean

Today, we're going to be talking about the housing market and whether or not it's going to crash in 2023. This is a topic that I've been getting a lot of questions about, so I wanted to address some of the concerns that people have.

The housing market has hit an all-time high in November after 10 months of rising prices. Americans are making record down payments as they rush back into the housing market. A recent Twitter poll showed nearly half of respondents were likely to buy a house in the next two years.

The real estate market historically experiences boom and bust cycles. Realtor.com's year-end review described the housing market as "frozen" in 2023. Existing home sales are on track to be the fewest since 1995, and pending home sales are at their lowest level since 2001.

The U.S. population has grown by 18% during this time frame. Median home price increased by 2.1% year over year to $428,000, a new record. There is a 3.2 million unit deficit in housing throughout the United States.

Nationwide affordability is at its worst since 1984, with 38.6% of median household income required for monthly payments. 99% of the U.S. is unaffordable for the average American making $71,000 a year.

An income of nearly $110,000 is needed to qualify for the average home at today's prices with a 20% down payment. On the West Coast, an income of $161,000 is needed to buy an average home.

Unemployment is at one of its lowest levels in history at 3.7%. Unemployment rates have historically risen due to various economic factors such as inflation and interest rate increases.

Inflation slowing down typically leads to increased unemployment rates. The average worker experiences a 6-7% income loss for each 1% point increase in the unemployment rate.

A recession in 2024 could weaken housing demand and stress existing homeowner finances, potentially prompting sales and reversing supply-demand balance.

Fannie Mae warns that personal consumption relative to incomes is at an unsustainable level and monetary policy effects are still working through the economy.

A survey shows only 16% of people believe it's a good time to buy a house, an all-time low. High mortgage rates are cited as the top reason for this sentiment, leading to low consumer confidence.

Jerome Powell suggests three rate cuts throughout 2023, potentially leading to federal funds rate of 4.5% and mortgage rates between 5.5% to 6.5%.

Wells Fargo predicts home prices will appreciate by 2.5% in 2024 and by 4.4% in 2025. Zillow forecasts a 6.5% increase in home prices by July of 2024, with Goldman Sachs agreeing that prices won't decline from current levels.

Sixty percent of homeowners have mortgages locked in below 4%, which may deter them from selling unless interest rates decrease significantly.

A drop in mortgage rates to around 5.5% could prompt more buyers and sellers into the market due to increased affordability and reduced disparity between current and potential mortgage payments.

Jerome Powell anticipates a soft landing for the economy in 2024 due to controlled inflation, strong GDP, robust consumer spending, and $6 trillion cash reserves ready for investment if needed.

Seasonal price swings can lead to lower housing prices during certain times of the year, with some regions experiencing up to a 22% difference between summer and winter prices.

Housing values have generally increased over time when adjusted for inflation, with only one decline in the last fifty years (in 2010).

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