Affordability issues, including high housing costs and significantly increased mortgage rates, took a toll on the 2022 residential real estate market across the United States—and Oregon was no exception. Will the downward trend continue in 2023?
Real estate company Redfin says yes, the downward trend will continue. “Redfin expects home sales to keep falling through 2023, leaving housing companies to negotiate a ‘jungle’ of uncertainty longer than once anticipated,” according to Redfin CEO Glenn Kelman.
Redfin’s Deputy Chief Economist Taylor Marr specifically predicts: “Mortgage rates will take center stage in 2023, with high rates likely to make it the slowest housing-market year since 2011…We expect about 16% fewer existing home sales in 2023 than 2022, landing at 4.3 million, with would-be buyers pressing pause due mostly to affordability challenges including high mortgage rates, still-high home prices, persistent inflation and a potential recession…That’s fewer home sales than any year since 2011, when the U.S. was reeling from the subprime mortgage crisis, and a 30% decline from 2021 during the pandemic homebuying boom.”
A 2023 report by Realtor.com also concluded that housing will slow in 2023, even predicting that 2023 could become a “nobody’s market,” meaning it will not favor buyers or sellers. Typically, a declining residential housing market has a bright side. In fact, the real estate industry routinely calls such declines a “buyers’ market” because buyers have more leverage and can score a better deal on a home. Unfortunately, high mortgage interest rates increase the “cost of capital,” so a decrease in the price of a house does not translate to overall lower costs for mortgage-seeking homeowners.
Location tells a more specific story
Overall, pending home sales slid for the sixth consecutive month in November, according to the National Association of REALTORS®, largely due to increasing mortgage rates, according to NAR Chief Economist Lawrence Yun. All four U.S. regions recorded month-over-month decreases, and all four regions saw year-over-year declines in transactions.
The organization’s Pending Home Sales Index (PHSI) indicated the biggest drops were in the West—largely due to affordability. According to the November index:
- The Northeast index fell 34.9% from November 2021
- The Midwest index fell 31.6%
- The South index fell 38.5% from the prior year
- The West index fell 45.7% from November 2021.
"The Midwest region—with relatively affordable home prices—has held up better, while the unaffordable West region suffered the largest decline in activity," Yun said.
For the Portland-Vancouver-Hillsboro market, Realtor.com predicts year-over-year 2023 sales growth to decrease by 10.7%. However, the latest December 2022 Redfin data indicated a still somewhat competitive Portland market. Home prices were down 1.8% compared to last year, selling for a median price of $500,000, in 37 days on the market, compared to 19 days a year ago. “There were 543 homes sold in December (2022), down from 1,032 last year,” according to Redfin.
In November 2022, according to the Redfin report, Portland home prices were down 0.095% compared to 2021, selling for a median price of $525,000 and staying on the market for an average of 27 days. In June 2022, Redfin reported Portland home prices were up 7.6% compared to last year, selling for a median price of $570,000, after an average of just six days on the market.
The Portland market is shifting quickly, but it is unlikely to experience a collapse. Portland is among the top-priced markets in the nation—which doesn’t bode well in a high mortgage-rate environment—but it is surrounded by even higher priced metropolitan areas, such as Seattle to the north and San Francisco or Los Angeles to the south. This makes Portland an appealing choice for buyers who want to live on the West Coast.
Mortgage rates and affordability
Realtor.com predicts an average 2023 mortgage rate of 7.4%, which is up from the 2022 average of 5.5%. The report also predicts greatly increased availability, with existing homes for-sale inventory growing year-over-year to a forecasted 22.8%, up from just 4.0% in 2022.
Redfin has a somewhat brighter outlook on mortgage rates: “We expect 30-year fixed mortgage rates to gradually decline to around 5.8% by the end of the year, with the average 2023 homebuyer’s rate sitting at about 6.1%. Mortgage rates dipping from around 6.5% to 5.8% would save a homebuyer purchasing a $400,000 home about $150 on their monthly mortgage payment. To look at it another way, a homebuyer on a $2,500 monthly budget can afford a $383,750 home with a 6.5% rate; that same buyer could afford a $406,250 home with a 5.8% rate…With a 3% rate, which was common in 2020 and 2021, that same buyer could afford a $517,000 home.”
The January numbers from Freddie Mac show some rate stabilization, with the weekly average, as of January 12, 2023, for 30-year mortgages at 6.33%. However, the organization’s latest commentary comes with cautionary language: “While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates.”
Clearly, mortgage rates effectively price out some buyers, particularly in expensive markets.
Can policy changes influence affordability?
Policy choices have influenced housing costs for decades. A lack of public housing is one of the most visible aspects of the housing crisis, but it represents just the tip of the affordability iceberg. Many of our current housing problems can be found in policy shifts that began in the 1980s. After funding public housing for decades, President Ronald Reagan made draconian cuts to public housing. His 1986 budget was described as “…a complete abandonment of a 50-year bipartisan commitment to low-income housing.” These cuts, along with restrictive zoning laws, absurd permitting practices and a host of other regulatory issues priced out would-be homeowners at various economic levels.
Portland's supply is restricted, in part, due to its geography; extensive mountains and waterways mean that new construction is naturally limited. However, onerous policy choices have restricted supply even further.
That is why some cities are opening more building options by updating their zoning laws. The movement began in Minneapolis in 2019 and Portland has already joined in. The Portland City Council approved zoning rules changes in August 2022 that allow duplexes, triplexes and fourplexes in areas previously reserved for single-family homes. This increases housing density in previously zoned single-family neighborhoods.
Another opportunity involves converting commercial property into residential units. For example, COVID-19 emptied out many downtown high-rise office buildings and developers are scrambling to repurpose some of this space. Repurposing commercial space could help solve affordability issues and increase public housing options. However, a robust repurposing effort will require regulatory cooperation through the provision of tax incentives and adjusting zoning requirements.
Challenging times for residential real estate
Clearly, 2023 will be an interesting year for residential real estate across the nation. Affordability will continue to plague the most expensive markets, including the Portland metropolitan area. Open-minded approaches to increasing housing supplies, however, could ease some of the affordability burdens.
Mick Harris is an associate in Tonkon Torp’s Business Department with a practice focused on corporate governance, general business matters and real estate. Mick counsels startups, emerging growth companies and large-scale businesses on venture capital and angel financings, mergers and acquisitions, commercial agreements and more. In his real estate work, Mick assists clients in a wide range of title, finance, transactional, leasing and regulatory matters and has a specialty in land use and residential landlord-tenant matters.