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Unbelievably, we're preparing to head into 2023.

And yet, we're ending the year the same way that we started it– with an uncertain housing market.

What exactly does the housing market– and those aspects of the U.S. economy that affect it– look like?

This month, we bring you the good and the not-so-good of the housing market, as well as speculation as to what we may see in the coming months.

To start off this month's update, let's go over some of the good news.

U.S. Gross Domestic Product: An Unexpected Rise

GDP annualized growth in the US

On Thursday, federal data revealed that the U.S. gross domestic product (GDP) rose 2.6% at a quarter over quarter annualized rate.

This is notable because it's a larger increase than economists originally estimated, with their estimate being 2.4%.

However, when adjusted for inflation, the GDP in the third quarter is roughly the same as it was in the third quarter of 2021. With that said, this number may begin to decrease according to the Commerce Department.

This is due to a drop in residential housing investing. A 26% hit to the residential housing market is a "monster" decline, according to Citigroup.

Some speculate that this potential housing market downturn is a product of the higher mortgage rates that we're currently experiencing.

In addition, GDP growth this quarter is expected to be at its peak. Fourth quarter GDP is expected to grow only 0.8%.

Inflation on Goods and Services Slow, but Personal Consumption Falls

Another metric of inflation that is worth taking a look at this month is the personal consumption expenditures (PCE) price index, which is essentially a measure of the prices that U.S. consumers are paying for goods and services.

The PCE price index has risen an annualized 4.2%, the slowest pace that it has increased since the end of 2020.

This is mostly due to a decline in residential investments and trade prices, however, which makes it less impactful. However, if you don't include prices for food and energy, this number rises to a more favorable 4.5%.

It's also important to note that final sales to domestic purchasers, which is essentially the amount of products and services that consumers are buying in the U.S., has shown an annualized growth rate of 0.5%.

That's a very slow increase, compared with the 2.6% average that we saw pre-pandemic.

Overall, these are less-than favorable numbers, with nearly 80% of middle-class workers saying that they're cutting down on spending because they're worried about not being able to afford the essentials.

The Labor Market Remains Strong

Some may find relief in knowing that, even though the U.S. is going through very rough economic conditions at the moment, job data shows that the labor market remains very strong in terms of the number of jobs being created.

The benefit of this is that the increase in jobs has helped bolster consumer spending which in turn increases the GDP of the U.S. However, the downside is that credit card debt has increased while savings has decreased.

This makes sense because we're still in the middle of a period of high inflation which makes it harder for consumers to save money.

Interest Rates Continue to Climb

30-ear fixed average mortgage rates

Regardless of the growing job market, the uncertain housing market– including rising mortgage rates– are taking a heavy toll on consumers.

Currently, the average rate for the benchmark 30-year fixed mortgage is 7.32%, which is up more than 15 basis points from the past few months. But the rate hike is likely to continue.

According to Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in an interview with Bloomberg's Isabelle Lee, “On the one hand, it is good to see that the economy is continuing to grow and that should bode well for the stock market. However, given that we are in the middle of an inflation fight, the Federal Reserve will likely feel that they need to continue to be aggressive in their rate hikes.”

Despite growth, the U.S. is still in the middle of an inflationary period, so the Federal Reserve is inclined to hike interest rates further until inflation slows.

The goal is to cause housing prices to decrease to avoid a potential housing bubble. However, how long that will take– and how long the Federal Reserve will decide to increase rates– is uncertain.

Some experts expect the Federal Reserve to slow rates throughout December while others are expecting a large rate hike during that time, so the immediate future of interest rates is yet uncertain.

Is the Market Headed for a Crash?

That's the question on everyone's mind, isn't it?

The last time we saw a similar real estate market was in 2005 - 2007, right before the market crashed– including home prices.

The 2008 housing crash came with disastrous consequences, which has now left investors and consumers worried about what is going to happen with the current market.

However, although many economists agree that the economy is headed for a recession, they also believe that the decline will not be as severe as it was 15 years ago.

In terms of the housing market, current homeowner's balance sheets are much stronger than they were previously.

The typical homeowner today has very good credit, equity, and a great mortgage rate locked in. This means that there isn't likely to be a foreclosure crisis as many aren't likely to lose their homes in the event of a downturn.

So, while even the world's greatest economists have a hard time predicting the future of the U.S. economy, the housing market appears to be in a much stronger position now than it was back in'05 - '07.

This should help to alleviate pressure placed on the housing market in the event of a recession and avoid a crash even if the market continues to be uncertain in the short-term.

Brian La Belle

Brian serves as liaison between Rok Lending's management team and strategic lending partners including investment banks, debt funds, sovereign wealth funds and other institutional investors. Brian is also responsible for originating loans and other potential investments.