The Housing Market Will Likely Cool in 2023: What Does That Mean for Affordability?

The housing market may be cooling, but affordable homes are still out of reach for many, according to a new report from real estate data firm ATTOM.

The company’s fourth-quarter 2022 U.S. Home Affordability Report found that median-priced single-family homes and condos are less affordable now than they have ever been in nearly every area of the country. In 2022, prices were higher than historical averages in 99 percent of U.S. counties, compared to 68 percent in 2021.

The report found that Collin County had one of the biggest affordability index declines in the country in the fourth quarter. The affordability index is an average of how much an individual’s income goes toward paying a 30-year mortgage and any expected housing-related expenses. Collin County is now at 50, up 20 points year-over-year.

Compounding the issue, the report said, is that the portion of average wages required to own and maintain a home is still considered unaffordable by most lenders.

Nationally, an average of 32.3 percent of a person’s paycheck goes toward paying the mortgage and housing expenses, which is up from nearly 30 percent in the third quarter of 2022 and 23.8 percent in 2021. Locally, Dallas County sits at 31.2 percent, Tarrant County at 37.4 percent, and Collin County at 52.5 percent.

Annual home price appreciation has outpaced weekly wage growth in 327 of the 581 counties ATTOM reviewed, including Dallas County.

Home mortgage rates have also nearly doubled in 2022 to almost 7 percent, increasing home ownership prices on median-priced homes by 10 percent in the fourth quarter, offsetting any price dips and wage increases.

“Prospective homebuyers – especially first-time buyers – can’t seem to catch a break,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “For the past two years, home prices have appreciated in double digits, 15 to 20 percent a year in some markets. Now that home prices have plateaued and even declined in some markets, buyers are faced with mortgage rates that have doubled, making home purchases even less affordable.”

ATTOM based its findings on the cost of a median-priced single-family home with a 20 percent down payment and a 28 percent maximum debt-to-income ratio. From there, the research company calculated the amount of income a prospective homeowner would need to pay for all major monthly home expenses, including a mortgage, property taxes, and insurance. ATTOM then compared that figure to wage data from the Bureau of Labor Statistics.

While home sales are down considerably across the country, the same isn’t totally true in the state — or locally.

Among the 48 counties in ATTOM’s report with a population of at least 1 million, the biggest year-over-year gains in median sales prices came in Collin County (up 34 percent); Hillsborough County, Florida (up 18 percent); Miami-Dade County, Florida (up 17 percent); St. Louis County, Missouri (up 16 percent) and Palm Beach County, Florida (up 16 percent). 

Figures from the MetroTex Association of Realtors, which compiles the data for local real estate transactions, indicate that November’s sales have slowed. Closed transactions statewide are down by about 29 percent statewide and Texas has 2.9 months of inventory, compared to 1.4 months last year.

In Collin County, closed sales were down by 32 percent, and inventory had increased to 2.4 months, compared to about three weeks in November 2021. Closed transactions were down by almost 33 percent in Dallas County in November, where there is two months of inventory. Tarrant County’s completed transactions are down by about 32 percent, and the county has about 2.2 months of inventory.

Economists say that four to six months of inventory—a figure representing how long it would take for a region to sell all its available homes—is a sign of a balanced housing market.

What does all this mean for next year? Texas A&M Real Estate Center lead data analyst Joshua Roberson said much will depend on how quickly the federal government can get a handle on inflation.

“A lot of 2023 is going to be dictated by how far we go in controlling inflation because as (inflation) rates increase, so will mortgage rates,” he said, adding that there is still a great deal of demand for homes in Texas.

“For example, this time last year, we were talking a lot about demographics—who’s buying homes,” he said. “A lot of millennial households were forming families and upgrading into houses, and those people are still here, and they still need houses.”

In a recent economic report provided by the center, Roberson says that he expects both price growth and rent growth to moderate next year, adding that he probably would forecast a slowdown even without inflation. He said the growth over the last two or so years “was never sustainable.”

The jump in home prices since 2021 was largely driven by interest rates falling starting in 2019, he said. The backlog of under-construction homes has built up while Texas developers and builders wrestled with supply-chain issues and labor shortages. Those new residences will contribute to extra housing inventory as they are completed and come to market.

What does this mean for 2023, though? If wages continue to grow, and home supply increases, there could be a moment where pricing becomes closer to affordable—but much of that will depend on whether the Federal Reserve continues to raise interest rates.

With the North Texas area still well under three months of inventory, it’s likely that (much like in 2008’s recession) the bubble might not pop, but it will shrink a bit.