ANAHEIM, Calif. — The housing market will remain sluggish as high mortgage rates curb demand in the early half of the year, real estate experts said. 

Still, the lack of for-sale homes, they say, expects to fuel Southern California and Orange County's single-family residential housing industry as the year progresses despite the potential recession and other Black Swan fears. 

Prospective home buyers should expect mortgage rates to drop and inventory to rise throughout the year, said Josh Schroeder, a realtor with Pacific Sotheby’s International Realty in Orange County. 

“[It’s the] return of the buyer as rates even out and hopefully a steady rise of inventory to put the housing market back on the path of health and strength,” said Schroeder.

With the coronavirus pandemic, which fueled housing demand, mainly in the rearview mirror, the single-family real estate market is adjusting to the new normal as 2023 begins.

Gone are the days of meager inventory, listed homes for sale sold in a matter of hours, bidding wars, and above-asking price offers.  

“The housing market is no longer insane, homes are, for the most part, not selling above their asking price, not selling immediately, not selling with multiple offers, and there is far less activity and buyer competition,” said Steven Thomas, an economist at Reports on Housing, a local housing data site that tracks Southern California’s housing market.

Home prices are also dropping slightly.

Jeff Fargo, AVP Sales and Digital Strategy at Fidelity National Title in Southern Nevada, said the Los Angeles region was one of the nation’s top ten cities with the greatest declines in peak home value. Home prices in the area have dropped 5.8%. 

“Steep housing prices compounded with sharp increases in mortgage rates were the main contributing factors to the Southern California housing slowdown,” said Fargo.

Last year, housing demand started hot — continuing 2021’s torrid pace — as a combination of low inventory and mortgage rates hovering around 3.25% fueled the market. But buyers became apprehensive and gun shy once the central bank began hiking interest rates, which impacted mortgage rates, in the year’s second half. 

As 2023 begins, according to Reports on Housing, Orange County’s housing inventory has fewer than 2,500 homes, the second lowest since the housing data site began tracking the information in 2004. Last year was the lowest number when fewer than 1,000 homes were listed for sale at the beginning of the year.

With many homeowners capitalizing on the low mortgage rates during the first two years of the coronavirus pandemic, Thomas said there’s a “hunkering down” effect leading to fewer people wanting to list their homes on the market.

“The only thing that concerns me is the number of people who still have homes with super low interest rates,” said Schroeder. “We do not have enough inventory, and this will only compound the issue.”

However, Thomas expects more homes to enter the market once mortgage rates drop below 5.5%, most likely sometime in mid-2023.

Thomas said the active inventory should peak around August, eclipsing 5,500 homes, well below the over 7,000 home peak average before the pandemic.

Still, demand will depend significantly on what the Federal Reserve does at its next several meetings. 

The Feds will meet again at the end of the month, and Federal Reserve Chair Jay Powell said to brace for more hikes to curb inflation.

There are also recession fears, and many companies in media and tech have announced layoffs. 

“I’m concerned with the outcome of the Fed’s aggressive rate hikes and the time it will take for a ‘course correction’ of a real estate market that experienced unprecedented year-over-year appreciation rates,” said Fargo. “Doomsday is far from upon us; however, elevated home prices compounded with climatic and economic challenges throughout California will make for a challenging 2023.”

But beyond 2023, the market should stabilize, many real estate experts said. 

Schroeder is predicting that 2024 and beyond will be a strong market.

“COVID really was the cause of high inflation and the cause of what the Feds are doing right now, and it’s really hitting the housing market more than everything else,” he said. “The underlying economy has shown in the jobs reports that it is still reasonably strong, and as we normalize all of that out, is sets up the potentially “soft landing” scenario where we have an extended return of stability in the market over a long period of time."