I am a humble real estate attorney with no pretense about being an economist. However, after practicing as a dirt lawyer for some thirty trips around the sun, I can read the tea leaves and confirm that inflation is rising, as are interest rates. Whether you believe that we are in a recession or that one is impending, history proves inflation results in higher interest rates—which, in turn, negatively impacts the real estate market. While I believe that to be true, there are other factors in play.
While it is also true that every action results in a reaction, throw in a few variables, and the expected results will be skewed. The post-pandemic years have created market situations that I have not seen in thirty years in practice. The inability to travel or leave one’s home resulted in the new world of remote work and the urge to use unspent vacation money for home improvements. Lower interest rates combined with feeling trapped at home incentivized homeowners to tap their equity and construct home offices, beautify their yards or install swimming pools. Simultaneously, extremely low interest rates in 2020 incentivized buyers to purchase their dream homes.
Similar to the characters in the 1960s television show “Green Acres,” many people who realized that they could now work remotely decided to sell their city homes and move to the country or even to another country. These factors all contributed to an extremely active real estate market in 2020 and much of 2021. Houses sold within days of being listed, often sight unseen with no contingencies and in excess of their true value as inventory was dried up. As time passed, this seller’s market shifted towards a more even seller/buyer playing field. Supply chain constraints spurred inflation and put upward pressure on interest rates.
These statistics are consistent with what we have experienced on the ground and felt in our wallets, but has the first month of 2023 been all doom and gloom? Not at all."
Despite intervention by the Federal Reserve Bank, the increase in interest rates had a noticeably adverse impact on the real estate market. Inflation, higher interest rates and reduced inventory really took their toll in late 2022. New construction was not a panacea as a result of the post-pandemic fractured supply chain and excessive building materials costs. Builders could not guarantee construction costs or completion times. Similarly, lenders became wary of granting construction loans. The end of 2022 ushered in waning consumer confidence, workforce downsizing and echoes of the 2005 and 2008 recessions. Pundits assumed that the real estate market would fall flat and fall fast in 2023. But has it?
Statistics compiled by the Massachusetts Association of Realtors reveal that in December 2022, overall sales of single-family homes dropped 30.5% from the prior year, the median price of a single-family home increased 1.9% (already taking into consideration the price drop during the previous 11 months) from the prior year, inventory decreased by 8.5% from 2021 and new listings dropped 26.7%. These statistics are consistent with what we have experienced on the ground and felt in our wallets, but has the first month of 2023 been all doom and gloom?
Not at all. January’s statistics are not as dismal as some would have predicted. The Federal Reserve is attempting to invigorate the economy by periodically reducing interest rates, giving investors and prospective homeowners the courage to jump into the real estate market. This, coupled with reduced prices in some markets, has kept the real estate market afloat. Inventory, such as it is, is moving. It’s unclear if this is a sign of consumer confidence or just anxious buyers grabbing what they can—perhaps it’s a little of both. But I suspect that were there greater housing inventory at the end of 2022, the impact on the real estate market would have been more traumatic. Prices would have fallen faster, while interest rates would have likely been on the rise.
Regardless, the real estate market needed a reset; however, the reset will take longer and be drawn out through 2023. My crystal ball informs me that this process will extend well into the fall and winter, and the true real estate freeze won’t take place until 2024. Of course, this is an educated guess based on decades of surfing the real estate ebb and flow. The more variables there are in the equation, the less predictable the outcome. The economy has been truly unpredictable over the last few years, but one thing is certain: in any market, real estate is and will remain one of the best long-term investments, and I don’t see that ever changing.
Kathleen Bernardo is Chair of the Real Estate practice at Bulkley Richardson, the largest law firm in western Massachusetts. Her practice focuses on commercial real estate matters such as conveyancing, financing, leasing, title matters and all aspects of complex property transfers. Kathy was selected by her peers for inclusion in The Best Lawyers in America® for 2023 in Real Estate Law.