5 Things We’re Watching in 2023

The FWD #181 • 993 Words

Just like last year, this one promises to be unlike any other in the housing world.

The housing world has been on a wild ride since 2020. We’ve seen lockdowns, supply chain setbacks, eviction moratoriums, bidding wars, record stimulus packages, and other phenomena none of us could have predicted just a few years ago.  

Today, it looks like we’re headed into the next chapter of our long, strange trip. The Federal Reserve, responding to runaway inflation, finally began to raise rates last March. Emergency eviction protections and rental assistance have mostly expired. And the midterm elections led to a divided Congress.

While your guess for what’ll happen this year is as good as ours, here are the five big things we’ll be paying attention to in 2023.

Buyers—and sellers—don’t have much to look forward to.

As expected, interest rates will likely continue to be the major story of 2023. In less than ten months, the Fed’s target rate has gone from near zero to 4.50. As a result, the average 30-year fixed mortgage rate shot above 7% last November, after sitting around 3% since 2020. Historically cheap mortgages are no more.

In their attempt to stick a “soft landing” and avoid a recession, the Fed isn’t expected to lower rates anytime soon. Danielle Hale, Chief Economist at realtor.com, expects this will lead to a “nobody’s-market” where lower demand—but still-low inventory—won’t make buyers or sellers happy.

Here at home, the Virginia REALTORS expect the market to stabilize. In their 2023 Economic & Housing Market Outlook, they forecast:

  • Declining inventory (-2.5%), but far below the losses in 2022 (-15.7%),
  • Rising home prices, but not as hot as last year (+2.9%, versus +7.0% in 2022),
  • Housing starts to continue sliding (-3.6% expected, -3.1% last year), and
  • Gradual decline in the average mortgage rate to 5.2%.

Rents probably won’t go down anytime soon.

Following record growth in 2021 and the first half of 2022, rents might have finally started to cool down last fall. According to CoStar, average rent in Virginia reached a historic high at $1,629 in 2022 Q2, before sliding to $1,619 and $1,599 in the last two quarters of the year.

The multifamily vacancy rate also ticked back up to a pre-COVID level around 6%, after dropping to near 4% in the middle of 2021. Overall, supply appears to be catching up with demand. Or, perhaps, the opposite is true: the high household formation rates we saw during the pandemic may now be waning, slowing demand.

Industry experts project that these late-2022 trends will continue into 2023. Economic uncertainty and costlier debt will keep new multifamily starts below what’s needed to meet our ongoing shortage. And while the peak of new apartment demand may have passed, many renters once on the hunt to buy a home are now sidelined and likely to maintain their lease.

In short, rents are unlikely to drop any further in 2023, but they also won’t be accelerating at the pace we’ve recently seen.

Get ready for a shutdown.

Last month’s FY 2023 omnibus spending package—which included $8.1 billion in new funding for HUD—may have been the last one congress will pass without a major headache in some time.

Today, the newly Republican-led House sets up a divided legislature that is unlikely to find timely compromises to keep the government running. National Housing Conference CEO David Dworkin suggests we dig up our old notes from the 2018 shutdown, and to “prepare for the worst but hope for the best.”

Ultimately, a Continuing Resolution is the most likely outcome, which would mean no major cuts to housing programs. However, many expect this to happen only after a government shutdown and possible default on our federal debt. Both of those scenarios could be catastrophic.

New actions on housing are expected from the White House.

Meanwhile, on Pennsylvania Avenue, consensus is building for new executive actions to help struggling renters. Following rounds of meetings with housing advocates and practitioners from across the country, the Biden administration is reportedly considering measures that would seal eviction records, standardize rental leases, promote right-to-counsel, and increase efforts to prevent discrimination against voucher holders. Look for more announcements on these decisions in the coming weeks.

Speaking at the National Action Network’s Annual MLK Day Breakfast this Monday, President Biden also alluded to new steps to strengthen the Affirmatively Furthering Fair Housing rule:

“We’re going to aggressively combat racial discrimination in housing, including working to restore the rule that says, if a community gets federal housing aid, it’s not enough to just say it won’t discriminate. It has to be meaningful, affirmative steps to overcome patterns of segregation and give everybody a fair shot that lives there.”

Notable state housing policy reforms are on the table.

Last week, state lawmakers kicked off the 2023 General Assembly session. This year is a “short” session, with only 30 (likely to be extended to 46) days to pass bills and adopt a budget—or face overtime in a special session later in the year.

Lawmakers still have until the end of this week to file bills, but there are already several noteworthy housing proposals to watch:

  • HB 2406 would require DHCD to conduct a “comprehensive statewide affordable housing needs assessment and plan” at least every five years.
  • HB 2100 would require localities to allow accessory dwelling units (ADUs) on all properties zoned for single-family, with certain conditions.
  • HB 1805 would allow the Virginia Resources Authority to finance projects related to community development and affordable housing.
  • HJ 498 would begin the constitutional amendment process to allow localities to offer tax exemptions to low-income property owners.

As for spending, the Governor’s proposed budget keeps the Virginia Housing Trust Fund level at $75 million for FY 2024. Advocates are calling for lawmakers to double this allocation to $150 million.

Stay tuned to the FWD all year long to see how these developments pan out!

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