2023 predictions that economists got wrong

With the average 30-year rate starting 2023 above 6% in January — a more-than-twofold rise from early 2022 — the mortgage industry yearned for a pullback to counter the rapid rise that stifled borrower sentiment. While the consensus view pointed to rates declining in 2023, few envisioned them heading in the opposite direction to a 23-year high. After briefly flirting with the 8% mark in October, current 30-year rates are closing 2023 approximately 60 basis points higher year over year.

A large miss on interest rate projections will ripple throughout the housing industry. "There's so many offshoots that have to do with rates," said Joey Davidson, CEO of Acopia Home Loans.

"It's consumer confidence, and it's builder confidence. In a way, it's home prices, its inventories — all those things stem from what the interest rate environment is doing." 

Driving rates higher was the stickiness of inflation and resilience of the economy. Experts failed to account for how the Federal Reserve would respond, Hodges said. Between January and July, the central bank raised the federal funds rate four times before pausing the rest of the year.

"They underestimated what the Fed was going to do," he said, while noting the effect the Fed's quantitative tightening policy had at keeping rates elevated.

When comparing spreads of the last 15 years prior to 2022 and the current level, "we've lived in the 180 basis point range somewhere. And we've been at a 300 basis points range. That is another factor that I think that had a much bigger impact on our rates than was forecast," Hodges said.

Researchers may also be overlooking historical patterns more than they should be by focusing too heavily on what the housing market did between 2009 and 2021. "That was just not a normal time period," Davidson suggested.

"It was bookended by two once-in-a-lifetime events, a mortgage meltdown and a global pandemic. So you've got to look at everything before that and everything after that to see what the new normal is," he added.

But it wasn't just the housing industry who misread where rates would go. "Think about the banks that went belly up. They were hedging wrong," Hepp said, referring to the spring crisis that saw the failure of some of the country's largest regional financial institutions. 

All vectors appeared to forecast that the U.S. would fall into recession by mid 2023, according to economists across the financial industry. By the end of the second quarter, though, with conditions from the labor market to gross domestic product still stronger than expected, the recession timeline was pushed out to the second half of the year. As the end of 2023 approaches, opinions are diverging with some surmising onset is still in the cards for 2024, while a growing number say the U.S. might manage to avoid one altogether.

A recessionary threat is closely tied to inflation levels and consumer spending, and Americans may have themselves largely to thank for keeping the recession at bay in 2023. 

Despite rising prices and predictions of an eventual slowdown, the American consumer shrugged off the doom-and-gloom headlines, said Kevin Schalk, partner and leader of the capital markets industry division at accounting and advisory firm, Baker Tilly. "Spending habits didn't change as a result of this." 

Pandemic relief measures are still playing a role in disrupting usual spending patterns, with  excess liquidity from economic stimulus programs still sitting in many bank accounts, keeping commerce humming, according to Schalk. 

Consumers' relationship toward spending has also shifted as a result. "The fear of a recession and all this inflation didn't have this scare effect that it may have otherwise had in different times," Schalk said.

"We're OK spending on credit cards, and credit card debt continues to climb."

While home prices would normally ease as rates rise and demand falls, the opposite occurred in 2023's unusual housing market. Rates in 2023, instead, effectively kept prices elevated, primarily due to their rapid acceleration in 2022, which disincentivized homeowners from selling and resulted in a dearth of listings. 

"What everybody was expecting was more inventory," Hepp said. "I don't think that we realized the extent to which people were going to feel locked in." 

For buyers, it meant little affordability relief. Although some of the leading price indexes showed a few instances of downward monthly movement in the first half of 2023, home values never achieved negative annual growth, a development some economists said would occur by the end of second quarter. 

CoreLogic's home price data showed property values up by 4.7% annually in October. Fannie Mae's index came in 5.3% higher at the end of the third quarter, while the Federal Housing Finance Agency similarly found prices up by 5.5%.      

An overlooked factor behind the tighter inventory of today that could persist beyond the short-term is a change in the lifestyle of older homeowners, a segment of the population that historically could be relied upon to add to housing inventory. 

"Where we would see older people downsizing, the inventory is not there for them," said Dave Miller, executive vice president of business development at mortgage subservicer Cenlar.

"The rates are high. And if they go to a rental, the rental rates are through the roof today," Miller added. "Are there more people that, in the past. would have made that decision that are just staying put, staying where they are?"