The housing market correction is much in the news and for good reason. In addition to sharp declines in the volume and speed of sales, we’ve also seen prices come down – for only the 3rd time in US history. But take heart. The pullback is expected to be mild compared to the Great Recession, when Portland home prices dropped 29% from peak to trough. Furthermore, every market offers chances to get ahead. Summed up in the graphic, this blog post reviews expert opinion to forecast key trends (Sections 1-3) and opportunities (Sections 4-6) in the Metro real estate market this year. Use the jump links below to skip to sections of most interest and relevance.
- A recession is more likely than not
- Prices will continue to decline
- Mortgage rates will also trend downward, but not to historic pandemic lows
- Move-up buyers – sell at a discount, buy at a bigger discount
- Cash downsizers – sell with a handsome total equity gain and minimize the cost of your replacement home
- First-time buyers – buy on a market downswing
- Caveats and call to action
1. A recession is more likely than not
We’ve already seen housing affordability and demand decline sharply, with last spring’s spike in mortgage interest rates coming on top of the pandemic run-up in prices. Now there’s broad consensus among economists that we face a recession in 2023 – though likely a mild one. Since spending and demand decline across the board in a recession, a downturn this year will intensify Portland’s housing market correction.
2. Prices will continue to decline
In other words, Metro area prices will keep going down for 2 reasons:
- Prices have not yet caught up to declines in affordability and demand to date. For example, just 19% of Metro households were able to afford the monthly payment for a home at the median sale price of $526K as of November.
- Housing affordability and demand will take another hit with the predicted recession.
3. Mortgage rates will also trend downward, but not to historic pandemic lows
From their high of over 7% in the fall, mortgage rates have already come down almost 1 percentage point. Many experts think they’ll stabilize in the range of 5-6% this year. For example, the Mortgage Bankers Association predicts a 30-year fixed rate of 5.6% by Q2.
Much as would-be buyers may hope for a return to the 3% range, experts believe that’s unlikely any time soon. We saw historic lows in the past few years as an indirect result of the Federal Reserve Board’s steps to support the economy in a unique crisis, the Covid-19 pandemic.
Now inflation is the challenge. With aggressive interest rate hikes by the Federal Reserve Board across 2022, inflation has come down from almost 7% in June to 5% in December. Yet the Fed announced a 0.25 point hike today and reaffirmed its commitment to two more in March and May. Many economists and business leaders think the Fed will go too far, not only bringing down inflation but also triggering a recession. These trends and expectations will put downward pressure on mortgage rates.
The bottom line – if rates come down to the mid-5’s by mid-year, they’ll a) reach the same level seen at the Portland market peak a year earlier, when buyers competed fiercely to pay top dollar for a home; and b) fall below the 50- and 30-year historical averages of 7.81% and 5.97% respectively.
4. Move-up buyers – sell at a discount and buy at a bigger discount
Assuming housing prices and mortgage rates trend downward as forecast in Sections 2 and 3, 2023 will be a good year for move-up buyers. That’s because larger and more expensive replacement homes will offer bigger savings than price hits taken on current homes with no change in rates from the market peak. The table presents calculations across 5 hypothetical price points, with the 1st representing a 2BR-2BA condo and the 2nd a detached starter home. Importantly, the figures in rows 4-6 are maximums in a range, as explained in Section 7.
|New home value at peak||$300K||$400K||$550K||$750K||$1M|
|New home price at trough||$255K||$340K||$467.5K||$637.5K||$850K|
|Savings on new home||$45K||$60K||$82.5K||$112.5K||$150K|
|Price hit on current home*||N/A||$45K||$60K/45K||$82.5K/60K||$112.5K/82.5K|
*In the 4th and 5th rows, values shown before slash marks (/) are for moving up 1 price point; and those shown after slash marks are for moving up 2 price points.
In real life, different price points or market segments don’t move in lockstep over time. Luxury homes, for example, have been hardest hit in the market correction. So selling at price point 3 or 4 and buying at price point 5 will likely yield the highest savings in both percentage and dollar terms. On the other hand, some price points or segments may see declines less than the 15% predicted overall.
Timing: Act mid- to late-year to lock in price declines and on-par-with-peak and lower-than-historical average interest rates. Normally, home prices and mortgage rates move inversely, so downward trends in both can’t last.
Tip 1: Keep an eye on your job security, a potential dealbreaker. Unemployment is expected to rise to the mid-4’s or about 1 percentage point in a recession.
Tip 2: In Portland’s correcting market, more sellers are offering temporary rate buy downs. This may be something to ask for in negotiations to achieve further savings on a bigger and better home. However, you should be able to manage your monthly payment comfortably once the temporary buy down ends – typically after 2 years.
Tip 3: Should we see significantly better interest rates in future (with a decline of at least 1 percentage point the rule-of-thumb threshold), those making a move in 2023 can take advantage of them if they refinance. However, since refinancing costs about 3.5% of the loan amount, homeowners should plan to stay put for several years to come out ahead.
5. Cash downsizers – sell with a handsome total equity gain and minimize the cost of your replacement home
The coming year should also be good to those moving from a long-time family home to one that is smaller, easier to maintain and ties up less capital. Granted, the hit a seller takes on their current home will be larger than the savings on a smaller and less expensive one. (Read the table in Section 4 backwards to see what I mean.) However, here are 3 offsetting factors to keep in mind:
- Paying cash for a replacement home will offer big savings in interest payments.
- Downsizers moving to lower cost markets (the Sun Belt, for example) or to condos and townhouses (which typically depreciate faster than detached homes in a downturn) will maximize savings on their replacement homes.
- Appreciation in the pandemic boom still far outweighs declines in value since the peak last spring, with Portland homes seeing an average net gain of almost 31% between March 2020 and last November – 6 months into the correction. Furthermore, the local market had a very good run in the years after the Great Recession and before the pandemic.
Of course, every homeowner dreams of selling at the top of the market – just as every golfer dreams of a hole in one. The fact remains that Portlanders with long tenures in their homes have done very well where growing equity and personal wealth is concerned.
Timing: To minimize further erosion of equity gains in the correction, it’s best to sell sooner rather than later.
Tip: Though current mortgage rates won’t eat into a cash downsizer’s equity on the buy side, capital gains taxes may on the sell side. Ask me for a basic explanation of how to estimate and minimize the tax bill on the sale of your longtime home. Of course, you should always seek tax advice from an expert.
6. First-timers – buy on a market downswing
If predicted trends come to pass, the market will be much friendlier to first-time buyers in 2023 than in 2022. Assuming rates in the mid-5’s, they’ll pay no more in interest than what we saw at the peak of the market but with prices down as much as 15%. That’s a significant improvement in purchasing power in the space of 18 months. For dollar figures, look no further than the 3rd column (since first-time buyers can rarely afford more than price point 3) and the 3rd row (since they don’t have a current home to sell) of the table in Section 4.
Timing: Act late in 2023 or early in 2024. Since conditions are more challenging for first-time than move-up buyers, it makes sense to wait out the market longer in the hope of further price and rate declines. Plus, first-timers can continue to grow their down payments and credit scores.
Tips 1-3 in Section 4 also apply to first-time buyers.
7. Caveats and call to action
The chances of selling at a peak or buying at a trough are slim and come down to luck. That’s because we can only identify highs and lows with some months’ hindsight. Still, a skilled realtor can track current trends against historical patterns and help you take advantage of and offset market trends. To put it another way, the figures in rows 4-6 of the table in Section 4 are maximums that only a lucky few can expect to realize. I’ll monitor prices and rates closely throughout the year, letting my clients know if and when the time is ripe for a move. Please be in touch if I can help you! email@example.com/503 705 5725