Home sales activity in Virginia will likely improve next year following a sharp decline this year, but rising prices and recently increased mortgage rates will continue to be key factors influencing the housing market, the Virginia Association of Realtors said Tuesday.
The state will close out 2023 with a 23.6% annual decrease in home sales activity, the association said in its annual forecast. If that prediction proves true, it would mark the second year of a significant slide in sales activity — about 123,000 homes sold in Virginia in 2022, which was 20% fewer than in 2021, according to VAR data.
Sales activity will then improve by 11.4% next year, the association said in its forecast. Home prices will continue to rise as well: Following a 4.4% statewide increase in median home prices in 2023, next year will bring a 1.2% increase, the association predicts.
While the VAR doesn’t produce regional forecasts, its chief economist, Ryan Price, noted in an interview that home sales prices in Southwest and Southside Virginia markets have been rising at a faster rate than in many other communities.
“A lot of these markets are attracting people from other parts of Virginia due to relatively lower price points compared to where they come from,” Price said.
Sales price data for August, also released Tuesday, shows a snapshot of this trend.
While the statewide median home sales price rose 7% in August from the year before, at least a dozen Southwest and Southside Virginia localities saw their median sales prices increase by at least 10%, including the cities of Bristol and Lynchburg and the counties of Bland, Campbell, Halifax and Pittsylvania.
About as many Southwest and Southside localities saw median sales prices increase between 5% and 10%, including the cities of Martinsville, Roanoke and Salem and the counties of Bedford, Botetourt and Washington.
Sherwood Clements, collegiate assistant professor of real estate at Virginia Tech, said he agrees with the VAR’s forecast that statewide housing prices will increase 1.2%, if for no other reason than simply the effect of inflation.
“Housing costs are going to go up — and therefore housing prices,” Clements said.
In its 2023 forecast issued in late 2022, the VAR predicted a decrease in sales activity for 2023 — but only 2.5% down from 2022, not the nearly 24% that its latest forecast predicts.
Price said most people did not expect mortgage rates to stay in the 6% to 7% range for much of the year.
“When you have the interest rate environment as it is now, it really hinders the number of homeowners that want to enter the market — the lock-in effect,” Price said, referring to the phenomenon of homeowners unable or unwilling to give up low fixed-rate mortgages to sell their homes.
Mortgage rates have steadily increased since the Federal Reserve began raising interest rates in March 2022 in an effort to combat inflation.
In the first quarter of 2023, the average rate among homeowners holding mortgages in Virginia was 3.8%, while the average 30-year fixed rate for a new mortgage at that time was 6.4%, Price said, adding that the gap between the two numbers illustrates that lock-in effect.
At the national level, as of Sept. 21, the average rate for a 30-year fixed-rate mortgage was 7.19%, up from 3.76% at the beginning of March 2022, according to Freddie Mac, a government-sponsored corporation that buys home mortgages and packages them into securities.
Before the latest run-up, that average rate had not been above 7% since 2001. The 30-year national average rate was at its lowest in the week ending Jan. 7, 2021, when it stood at 2.65%.
For context, the monthly payment of principal and interest on a $200,000 home loan with a 7% rate would be $1,331, which is $132 higher than the same loan at just one percentage point less, 6%. It would be $525 higher than the same loan at the January 2021 low of 2.65%.
The Virginia Association of Realtors forecasts that “30-year fixed-rate mortgage rates will continue to be volatile in 2024 but will gradually trend downward to about 6.15% by the end of next year.”
Clements, the Virginia Tech professor, said he disagrees with the VAR that mortgage rates will decrease.
“I have a hard time believing that the Fed is going to drop interest rates. … I’m a little bit more pessimistic on the mortgage rates side,” Clements said.
The Federal Reserve has been raising rates with an eye toward pulling U.S. annual inflation down to a goal of 2%, yet annual inflation rose in August to 3.7%.
“We had a very long period of low interest rates, but these interest rates might be what we call normalizing,” Clements said.
Price said the market right now for buyers is “pretty tough.”
“I think the interest rates, obviously, are a huge deal because it reduces the purchasing power that you can afford,” Price said. “When you reduce the purchasing power, it tends to narrow the pool of homes you can look at. And because we are seeing prices increase, not decrease, it’s kind of a double hit there — you’ve got higher prices and more expensive financing.”
The situation isn’t much better for sellers, who Price noted usually immediately turn into buyers because they need somewhere else to live.
“A lot of sellers wouldn’t even be able to afford the neighborhood they live in,” Price said.