2023 New Year’s resolutions for buyers

My, how the tide is shifting for home buyers, sellers, renovators, investors and owners.

At the end of 2021, we wrote that “COVID-19 is a trend accelerator.” When it came to buying a home, the pandemic produced the lowest interest rates in history, the fastest jump in interest rates in history, and the fastest rise in home prices. It also exacerbated an ongoing housing shortage.

In June, 2021, the National Association of Realtors (NAR) declared a U.S. housing shortage of between 5.5 and 6.8 million units. In Harvard University’s annual State of the Nation’s Housing report, sponsored by Habitat for Humanity, the U.S. housing deficit is estimated to be 3.8 million units. NAR debuted a Housing Shortage Tracker, which estimates the U.S. is still short around 5.5 million homes.

It doesn’t look like the housing shortage is getting better anytime soon, according to the Counselors of Real Estate math: “The current annual pace of new residential supply is about 1.6 million units per year based on construction starts, which is close to the estimated demand from new households of 1.1 to 1.3 million-plus obsolescence/demolitions of 0.2 to 0.4 million.”

In other words, if the U.S. produced 1.6 million new units, it would just about cover demand. Unfortunately, according to the latest Census figures, an estimated 1.49 million new homes will be completed in 2022, adding to the housing shortage.

As the pandemic finishes the third year, the real estate industry has experienced a year of “never befores.” We’ve never before seen interest rates jump up as quickly as we have this year. On Dec. 23, 2021, mortgage interest rates were 3.05% according to the Federal Reserve Bank of St. Louis. Mortgage interest rates hit a high for the year of 7.08% on Nov. 10, 2022. The last time interest rates were this high was April 5, 2002, when they touched 7.13%. And that, presumably, is for those with the best credit scores. Interest rates for buyers with an average credit score might have locked in at even higher rates.

We’ve also never before seen home values skyrocket in such a short period of time. “U.S. house prices appreciated a remarkable 94.5% from first quarter 2013 to second quarter 2022 — a 60.8% rise after adjusting for inflation. The magnitude of the increase is even larger than that of the preceding housing boom, from first quarter 1998 to second quarter 2007,” wrote Dallas Fed economist Enrique Martínez-García. By July 2021, housing prices were increasing at an annual rate of 19.3%, according to the Federal Reserve Bank of Dallas.

And another never before: Home prices rose in 2022 while interest rates jumped. Typically, when interest rates go up economists expect home prices to go down. According to NAR, home prices rose in 98% of metro areas in the third quarter of 2022, rising 8.6% to $398,500. The monthly mortgage payment on a typical existing single-family home with a 20% down payment was $1,840 — up 50% from a year ago.

However you look at it, home buyers and owners have enjoyed two decades of extremely low interest rates, which fueled home buying power and, for many, home equity. Nationally, home prices rose more than 40% during the pandemic, the fastest pace in history, Martínez-García added, but could fall as much as 20% in a “pessimistic” scenario.

Extremes are never a good thing in real estate (unless it’s the lowest mortgage rates in history) and yet those are already informing what next year will look like. With that in mind, home buyers may want to be ready to leap as soon as the housing door cracks open.

Consider following these New Year’s resolutions to be ready for whatever may come for housing in 2023:

Home Buyer Resolution No. 1: Know what you can afford.

Affordability is dependent on a number of factors, including your credit score (higher the better), interest rates, how much your family earns, and the cash you have on hand for your down payment. Your credit score will directly affect the interest rate on the loan, which has a multiplier effect on how much you can borrow. Your debt service (how much you pay each month) will be subtracted from the total amount you can spend on your mortgage, taxes and homeowners insurance.

Once you have a handle on these four components, it’s time to get preapproved for your loan.

Home Buyer Resolution No. 2: Get preapproved for your mortgage.

When you get preapproved for a mortgage, your lender agrees in writing to fund your loan, provided the home you choose appraises out in value. Getting preapproved allows you to know precisely how much mortgage you can carry, because the lender will take into account your debt payments, income and credit score. Once you have this number, you’ll add the amount you have available for a down payment to come up with the approximate purchase price. (Don’t forget to plan for a few months of cash reserves the lender will require.)

Remember: preapproval is different from prequalification. A preapproval letter means that the lender has reviewed your credit, undertaken a review of your credit file and decided it will fund your loan. The details of your financial life are verified. With prequalification, no one verifies the information you provide to the lender.

Home Buyer Resolution No. 3: Decide what tradeoffs you’re willing to make.

As we end 2022, home prices are starting to trend down. But that doesn’t mean you’ll be able to afford everything on your wishlist. In fact, the opposite may be true, and you could find yourself buying something in a neighborhood or condition you would have rejected a few years ago.

So, make two lists: everything you want in a home and everything you can’t live without. In her book, “100 Questions Every First-Time Home Buyer Should Ask,” Ilyce calls this the “Reality Check,” and it’s a useful way of prioritizing what’s really important to you as a home buyer.

Next week: New Year’s Resolutions for Home Sellers and New Year’s Personal Finance Resolutions for Everyone.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)