REI INK’s 2023 Real Estate Outlook
Changing Trends Bring Opportunities in the New Year
By Carole VanSickle Ellis
As the end of 2007 drew to a close, the state of the housing market was not confusing; it was just bleak. 10 million mortgage borrowers were set to lose their homes. New-home sales volumes had fallen by more than 26% (a record), and the median price of a home had fallen by 10%. The housing market was clearly heading for a nasty, nasty crash, and the whole country knew it as the 2008 New Year rolled around. Now, 14 years later, the word “crash” is floating around real estate circles again. However, it does not necessarily mean the same thing it did in the mid-2000s, and that is a good thing for real estate investors and the national economy as a whole.
“A crash would be a consistent with a lot of foreclosures: people losing their homes with prices falling below the amount of mortgage debt that is owed, and people being forced or voluntarily leaving their homes,” explained Mark Zandi, chief economist at Moody’s Analytics.
Lawrence Yun, chief economist for the National Association of Realtors, agreed, declaring around the same time that today there is “no actual crisis in terms of foreclosures or people being forced to sell at a loss.” However, both economists and many other real estate professionals and analysts agree: A correction is coming. The question, for most investors, is one of where the correction will hit rather than if or when.
“The market is going to shift,” said Virginia real estate investor and agent Chris O’Neal. “We went through COVID, and you did not see very many foreclosures and short sales [during that time]. Now, the market is definitely set to drop a little, but that just means it is a good time for investors to pick up some of these deals.” O’Neal, who teaches real estate agents how to acquire investment properties for their own investment portfolios, does not expect his market to experience a particularly dramatic downturn, but he said that he is already seeing changes as 2022 draws to a close. Properties for sale may not be in as good of a condition as they were just a year earlier, and sellers are definitely feeling more motivated to get a deal done and closed.
“When people are worrying about foreclosure or in pre-foreclosure, they are not making upgrades before they sell,” O’Neal explained. “If they cannot pay their mortgage payment, they probably are not paying to fix up the house. These properties will usually go to investors because most [retail] buyers do not want to tear up floors, remodel kitchens, or replace a roof right after they move in.”
Rick Sharga, executive vice president of market intelligence at ATTOM Data, also expects a “slowdown” in real estate in 2023, but emphasized that a variety of factors should combine to prevent a full-fledged housing meltdown. “From a price standpoint, we are not likely to see a housing crash in 2023,” he observed in late November 2022. “Year-over-year prices are still going up, although not as rapidly as they were a few months ago. We are facing another year of very low inventory and demographically driven demand [from young adults entering the market], and we are not likely to see builders overcrowding the market in the coming year,” he explained. “The whole supply-and-demand environment going into 2023 is the opposite of what it was [heading into] 2008.”
Sharga did note that corrections were likely to be highly localized, with some markets potentially experiencing double-digit losses while others hold steady or even continue to gain value. “The reality is that it comes down to the local market,” he concluded. “California could drop 10% off its peak, while the southeast might not see price declines at all. ‘Zoom towns’ could see huge declines, but there could be a short-term boom in single-family rental (SFR) markets as home prices climb out of reach.”
Zoom Towns Could Spiral Down
In early 2020, the entire country took a hard turn into remote work, discovering that not just any internet connection (or open-plan room layout) could support several kids watching online school and two adults working remotely and full-time. However, as the year progressed and the pandemic refused to fade, more and more workers settled into remote work and, for many, the new full-time home-office lifestyle meant new opportunities they had never previously imagined.
As workers moved themselves and their families to more scenic locales thanks to the absence of a required commute, “zoom towns” sprang up in attractive locations offering relatively affordable housing like Boise, Idaho; Bellingham, Washington; and Nashville, Tennessee. Home values in zoom towns shot upward. Nashville prices rose 56% between February 2020 and September 2022, while Boise posted roughly 20% gains in 2020 and 25% gains in 2021. In fact, the population of Idaho as a whole grew by nearly 3% during the pandemic.
“Historically low inventory coupled with rampant demand resulted in above-average price growth and a highly competitive market [in zoom towns like Boise],” observed Norada Real Estate Investments founder and CEO Marco Santarelli. “However,” he added, “The changes we are seeing now in Boise price growth, inventory, and slower market times are moving us toward more normal market conditions.” Given that Moody’s rated Boise as 72% overvalued in 2022, those “more normal market conditions” could represent huge opportunities for a real estate investor willing to watch and wait for the bottom of a zoom-town price correction.
Another factor in the zoom town correction trend will be employers’ willingness to permit remote work in the post-pandemic market. Although some analysts predict that one in four jobs will become permanently remote by the end of 2023, others warn that remote work could be on its way out.
“Conditions for remote work appear to be cooling down much faster than for non-remote jobs,” observed LinkedIn head of economics and global labor markets Rand Ghayad in his November 2022 labor market update. He cited a “slowdown in remote openings and an uptick in the number of people who want more [remote work]” as causes for the cooldown. He also predicted the “power balance” between workers and employers would likely “level out” in 2023, which could be tough on zoom towns that were mainly attractive because of their relatively remote locations rather than for a more diverse array of reasons or affordable housing options.
As fewer businesses offer fully remote positions, zoom towns are likely to suffer deceleration even if they remain attractive to homeowners overall. For example, although Phoenix, Arizona, where home values shot upward by 25% in 2022, is unlikely to see serious losses in 2023, appreciation rates are likely to level off as competition for homes on the market declines thanks to rising interest rates. For investors, this could represent an opportunity to offer would-be homeowners access to creative financing or simply begin building an SFR portfolio.
The ability to “read the room” in a zoom town market will be essential since some of these markets were already attractive before the pandemic while others were barely on the map. According to Rick Palacios, director of research at John Burns Real Estate Consulting, his team is watching five specific markets for price declines in 2023. Those markets are Boise, Idaho; Austin, Texas; Nashville, Tennessee; Phoenix, Arizona; and Sacramento, California. Palacios correctly predicted earlier this year that only Boise would actually lose ground in 2022, but he expects “the sharpest price drops in 2023” in the latter four locations.
A “Middle America Comeback”
While zoom towns are likely to take some pretty serious hits in 2023, “middle America” should be taking advantage of the opportunity to stage a “comeback,” wrote Business Journal Daily contributor and experienced contractor Joe Metzger in November of this year. Metzger said that since remote work is “here to stay,” the trend will likely benefit areas of the country like the Midwest, where prices did not skyrocket so dramatically during the pandemic and where housing is still relatively affordable.
He believes Americans will readily move for the opportunity to acquire real estate and keep household costs down.
“Our relocation tendencies are as American as coming home for the holidays, and people always want a better deal,” Metzger explained, concluding, “The table is set for a Middle-America comeback.” In areas of the country like Metzger’s Youngstown, Ohio; Louisville, Kentucky; Birmingham, Alabama; or Memphis, Tennessee, relatively affordable rental housing and generally competitive cost-of-living metrics could keep these areas stable in 2023 and contribute to growth even as inflation and interest rates discourage many households from buying.
“As affordability has become the key driver of both supply and demand in the market, places that still feature reasonable prices are already seeing momentum shift their way and should have the healthiest housing markets in 2023,” wrote Zillow analysts in the company’s annual housing predictions report released this past December. The group concluded, “Midwestern markets will heat up, and we should see a jump in homeowners becoming first-time landlords [due to pandemic-fueled second-home acquisitions].”
The team predicted that with a “bearish” Wall Street on the horizon, homeowners with multiple properties are likely to hold onto investment properties, “especially in areas like the Midwest Sun Belt, where household formation and housing is stronger.” Zillow’s analysts added, “Rents should rise faster than home values over the next year, [and] new construction strength will be in rentals.”
However, not everyone who took advantage of low interest rates and relaxed COVID-era payment policies will necessarily have the ability to become a landlord for the “extra” home when things get tight. “Foreclosures are certainly coming back around in 2023,” observed Dana Nutt, a northern Michigan-based investor who specializes in rehabbing residential and recreational properties. “The people who are going to get hurt the most are middle-class homeowners and homeowners in lower-end homes,” he predicted. “There are going to be a lot of deals out there and investors will be able to work with a lot of people who need to move.”
Realtor.com chief economist Danielle Hale noted that the affordability challenge will likely increase in 2023, with more would-be buyers finding themselves forced to keep renting. “The last two years left indelible marks on the housing market,” Hale and her team observed in its 2023 outlook released last month.
“Among those, the Federal Reserve’s monetary policy combined with a long-term underbuilding trend caused a whiplash in affordability.” Ultimately, the team projected midsize markets “with local industry tied to manufacturing, education, healthcare, and government” would outpace the national market in 2023. “Annual sales in these markets will grow by over 5%…compared to a projected national drop in volume of 14%,” they said, listing El Paso, Texas; Louisville, Kentucky; Grand Rapids-Wyoming, Michigan; Chattanooga, Tennessee; and Toledo, Ohio, as markets where prices might also bump upward in the coming year.
“Stay Safe (From Rising Interest Rates), Stay Home”
Perhaps the biggest contributor to the slow deceleration of the national housing boom in 2023 will be Federal Reserve interest rate policies. While the housing correction certainly must happen at some point in the relatively near future for most parts of the country, a sharp decline in home prices or the catastrophic visions of zombie neighborhoods that most people remember when they think back to the mortgage meltdown that precipitated both the last housing crash and the global financial meltdown is unlikely to occur simply because mortgage rates for the past few years have been so very affordable. If a homeowner can afford their house payment and is not forced by external factors to move, the odds are that they will opt not to do so in 2023.
“There is not enough inventory out there for renters or homeowners,” Sharga said bluntly. “Around 70% of current homeowners have a mortgage rate below 4%. They are not rushing out to take on a 7% (or higher) mortgage unless they really need to sell their house and move.” He added, “93% of borrowers in default [at present] have positive equity, and fewer than 3% are seriously underwater and owe 25% or more than their home is worth.”
The combination of these factors and a market’s unique pandemic experience, be that as a zoom town, a climate-based destination like most of the southeast, or a departure hub, as were many major urban centers in 2020 and 2021, will determine how every market reacts to the ongoing post-pandemic shifts in 2023.
For investors, the key to successful investing in the New Year will be, as always, the ability to correctly gauge a market, resist the urge to “jump the gun” in areas where prices are falling, and identify the best strategies, be they short-term fix-and-flip tactics or longer-term rehab-to-rent or creative financing options, for every potential deal and geographic location.
Sidebar 1
Zoom Towns & Remote Work Trends by the Numbers
26 — percentage of employees working remotely in 2022
16 — percentage of U.S. companies fully remote in 2022
33 — number of companies that announced they would “go permanently remote” in 2021*
72 — percentage that Moody’s Analytics estimated Boise, Idaho, was overvalued in early 2022
75 — percentage that Austin, Texas, home values rose between February and December 2022
56 — percentage that Nashville, Tennessee, home values rose between February and December 2022
17 — percentage decline in home sales in Nashville in Q1 2022 (year over year)
27 — percentage increase in homes for sale in Austin in Q2 2022 (year over year)
19.5 — percentage of homes on the market nationally that dropped their asking price at least once in August 2022 (compared to 11% the year prior)
* Note that some of these companies, like Amazon, only permitted certain divisions to work remotely and that other companies, like Twitter, have new leadership that rescinded the remote-work policy.
Sidebar 2
By the Numbers
14 — percentage by which Realtor.com predicts national home sales volumes will fall in 2023
5 — percentage by which Realtor.com predicts home sales volumes in El Paso, Louisville, Grand Rapids, Chattanooga, and Toledo will rise in 2023
20 — percentage higher that monthly mortgage payments are likely to be in 2023 compared to 2022
15.8 — percent increase in rent, year-over-year, in Louisville, Kentucky, as of October 2022
