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Many Americans have big plans for 2023. Some are looking to boost their savings balance. Others are looking to get out of debt. And two-thirds of Americans are planning to buy a home, sell one, or refinance a mortgage in 2023, according to the latest BMO Real Financial Progress Index. But given the state of the housing market and where mortgage rates are sitting, a lot of people with these plans may not end up being successful.
The problem with buying in 2023
We're looking at starting off 2023 with continuing low real estate inventory and elevated home prices. And until housing inventory picks up in a meaningful way, property prices are likely to remain high. That could make for a very challenging situation for home buyers.
Not only are home values up, but mortgage rates are more than twice as high as they were a year ago. So those who attempt to purchase a home risk getting in over their heads financially.
The problem with refinancing in 2023
The benefit of refinancing a mortgage is getting to lock in a lower interest rate and reap savings. But given where mortgage rates are sitting right now, many buyers aren't in a position to lower the interest rate on their home loans.
A lot of people rushed to refinance their mortgages loans in 2020 when rates began to plummet. So anyone in that boat is unlikely to snag a better rate in 2023.
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Now it may be that some people who signed a mortgage in 2022, once rates were higher, wish to refinance in the new year. But there are closing costs that come into play in the course of a mortgage refinance. And so generally speaking, it only makes sense to refinance a home loan when there's the chance to lower its interest rate by about 1% or more.
We could see lower mortgage rates at some point in 2023, but the days of borrowing at 3% are probably over, at least for the foreseeable future. And so those who look into refinancing their home loans may find that it just doesn't pay.
What about selling a home?
While home buyers and would-be mortgage refinancers may want to reconsider their plans for 2023, those looking to sell a home may be on the right track. Although higher mortgage rates have narrowed the buyer pool modestly, the demand for homes still exceeds the available supply. And so sellers who list a home in 2023 might benefit from a major lack of competition.
That said, those selling a home and buying a new one with a mortgage will need to proceed with caution. What they gain in the form of a higher sale price, they might lose in the form of a higher interest rate on a new mortgage they have to take out.
All told, 2023 could be a very interesting year for the housing market. But those looking to buy a home or refinance a mortgage may find that doing so isn't the savviest move.
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