Real Estate Agent Magazine Economy and Housing Market Declining Inflation Improves Home Affordability

Declining Inflation Improves Home Affordability

As the economy improves, mortgage rates could even decrease to below 4% and encourage potential buyers to return.

Recent months have witnessed a reduction in inflation rates, which contributed to reduced mortgage rates over the holidays. Consumer prices remain well above their historical 2% rate of inflation but November’s 7.1% mark marked its lowest level ever this year. Deceleration is one key reason behind projections of 5.5% mortgage rates by second half 2023, though should deceleration accelerate faster than expected, rates in the 4% range may become available and could attract buyers back into the market.

Rents people pay and equivalencies of rent that owners would have paid are among the primary factors contributing to a decrease in inflation, with gains reaching 7.9% and 7.1% annually, their highest increases since the early 1980s. This incredible growth can be attributed to housing shortages with historically low rental vacancy rates; but data shows this shortage may not be as severe; rental vacancy rate was 6.1% during third quarter 2022 up from 5.8% previously while overall sale inventory is up 2.7% from December of last year and rental property managers report marked slowing of rental rate gains from their customers.

Furthermore, multifamily housing starts – comprised mostly of apartments – reached 550,000 units in 2022 – the highest total since nearly four decades. Apartment vacancy rates will undoubtedly increase while rent growth will likely slow; consumer prices should steadily decline even further.

NAR has long advocated for the transformation of vacant commercial space (e.g. shopping malls or office buildings) into residential units through funding and/or tax credit incentives. Furthermore, financial incentives to rehab dilapidated, abandoned homes will bring forth greater housing supply as well as greater neighborhood safety.

As for the economy, recession could be in sight or not. GDP has been drifting along at near-zero growth rate but job creation remains strong despite layoffs in certain industries; overall job openings still exceed unemployment by seven-to-1 despite this ratio; net job creation will amount to approximately one to two million this year – and those taking those jobs are future homeowners.

First-Time Buyer Share Remains Low
Only 28% of home sales were by first-time buyers in November 2022 – unchanged from October and up slightly from 26% from November 2021. National Association of Realtors’ 2022 Profile of Home Buyers and Sellers released this November found that this was their lowest ever annual share since they started tracking data for this series of reports.

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