2023 Housing Market Predictions

The housing market is one of the most vital components of the US economy, and it has undergone significant shifts and changes in recent years. 

As we kickoff 2023, several questions linger about what the future holds for the housing market. Will we see a continuation of current trends, or will new factors emerge that will significantly impact the market? 

In this blog, we’ll explore six key predictions for the US housing market in 2023, including inventory shortages, interest rates, home prices, and the risk of a housing crisis. We’ll also consider how these predictions may impact buyers, sellers, and investors in the coming year.

Let’s dive in…

Inventory Shortages Are Most Likely Here to Stay

Based on recent trends and data, NAR's Economist Lawrence Yun predicts that inventory shortages will continue to persist across the nation. The shortage of available housing units for sale and rent remains a significant issue, with estimates suggesting the inventory shortage currently hovering anywhere from 3-to-6 million units. Additionally, despite some progress, the housing market has yet to fully recover from the impacts of the Great Recession, which has further exacerbated the issue.

More recently, we have also seen material and labor shortages become increasingly common post-COVID, adding to the challenges faced by the housing industry. These supply chain disruptions have led to delays and higher costs for construction projects, making it even harder to address the ongoing inventory shortage.

It is essential to recognize that this shortage has significant implications for the housing market, with prices continuing to surge as demand outstrips supply. To keep up with population growth and increasing demand, it's estimated that the United States needs to add around 5.5 million single-family and multifamily units in the coming years. Without addressing this shortfall, prices will likely continue to rise, making homeownership increasingly unaffordable for many Americans.

The State of the Housing Market May Be Dependent on Interest Rates

According to Odeta Kushi, Deputy Chief Economist for First American, an increase in mortgage rates in 2023 poses the biggest threat to the housing market. This could be a result of ongoing or worsening inflationary pressures. Higher mortgage rates would have a dual effect on the housing market: pricing out buyers who would lose purchasing power and locking some potential sellers into their current rates.

Kushi believes a continued rise in mortgage rates and high inflation could freeze a housing market already cooling down quickly. If Americans continue to hold off on buying, she predicts that home prices in many metropolitan areas, particularly those that saw a surge in prices earlier in the pandemic, could experience declines from their peaks.

Kushi emphasizes that the key trend to keep an eye on is whether mortgage rates will continue to climb and by how much. She asserts that once rates reach their highest point, home sales volume and price declines will level off. This outcome will depend on the Federal Reserve's actions in the coming months and whether inflation starts to decrease.

Home Prices May Drop 15% in Certain Markets

According to Ian Shepherdson, the founder and chief U.S. economist of Pantheon Macroeconomics, the price-income gap, increased house supply, and high mortgage rates could result in a continued deceleration of the housing market instead of a significant rebound this year. 

Shepherdson believes home prices may fall by another 15% in 2023, leading to the largest housing correction since Post-WWII. This prediction is backed by KPMG analysts, who suggest a possible 20% price decline, while Goldman Sachs and Morgan Stanley predict 6.1% and 4% drops, respectively. According to Fox Business, home prices rose by 2% year-over-year in Dec. 2022, with home sales decreasing for the 11th consecutive month. 

The National Association of Realtors' Housing Affordability Index data reveals that although down significantly from pandemic levels, home prices are near the unaffordability levels seen in the early 1980s. Shepherdson states that there is "no floor in sight" for declines in house sales but is optimistic that continued price drops will eventually help to balance out the market sometime in 2023. 

According to Shepherdson and Pantheon's senior U.S. economist, Kieran Clancy, any rebound in sales from here will be small, and monthly payments for a new buyer of an existing home were still up 54% year-over-year in December.

The Risk of a 2008 Repeat is Low

Current homeowners are not facing a dire situation, as they have likely accumulated substantial home equity and benefited from historically low interest rates. ATTOM, a real estate data company, reports that less than one percent of homes are in foreclosure, a significant decrease from the 4 percent peak during the 2008 housing crisis. Additionally, of the foreclosure homes, 93 percent have equity, meaning that homeowners in financial difficulty could sell their homes and potentially receive cash in hand. 

Rick Sharga, an executive vice president at ATTOM, reassures that there is almost no chance of a 2008-style crisis, where millions of subprime borrowers defaulted on their loans and caused the housing market to crash.

In response to the housing crisis of the early 2000s, federal legislation was passed to regulate the banking industry and lending practices. Then, during the pandemic, banks further tightened their requirements, resulting in a generation of financially stable buyers with significant down payments, impeccable credit scores, and more income documentation. This ensures that they are well-positioned to pay their mortgages, even if the value of their homes dips or the economy experiences a downturn.

While buying a home now may be more expensive than a year ago, the current market has advantages for buyers. First, shopping for a home is less stressful, as buyers no longer have to overbid or sweeten deals with extravagant promises. Instead, they can take their time to think and negotiate repairs or a price reduction. 

As Greg McBride, the chief financial analyst at Bankrate.com, states, "It's a much better time to buy now than it was six months ago... You're not competing with 44 other people in front of you in line at the open house. You're not competing with people putting in offers sight unseen. That was not a good environment."

Buyers May Have More Negotiation Power in 2023

According to Danielle Hale, Chief Economist at Realtor.com, home buyers may have more negotiating power in the current housing market. This is due to an increase in the number of homes for sale which may give buyers the ability to negotiate a lower price or see a home with a lowered list price compared to the original asking price. 

Hale also notes that the lengthier time homes spend on the market compared to a year ago could give buyers more negotiating power. However, it is important to note that a higher inventory of homes for sale does not necessarily mean that home prices will decline. Ultimately, buyers may be able to take advantage of a more favorable market in terms of negotiation but should still be prepared to pay a fair market price for the home they desire.

Variability May Increase Between Markets

Over 2023, we can expect to see a change in the real estate market. While "hot" was the most common word to describe most real estate markets in early 2022, this won't be the case from now on. 

According to Lisa Sturtevant, chief economist at listing site Bright MLS, the market will no longer be uniform as it has been in recent years. Instead, the real estate market will see more variability between different metros and regions, with some experiencing a significant drop in demand while others remain in high demand and see an increase in home prices.

Speaking at the National Association of Realtors Real Estate Forecast Summit in December, Sturtevant explained, "For the last couple of years, we could have talked about all housing markets across the country basically using the same language. In 2023, though, there will be a lot of variability in how these markets are adjusting."

The metros most likely to see a significant fall in home prices are the "Zoom towns" - cities that attracted many pandemic buyers who had shifted to remote work and were looking for more affordable housing. Sturtevant noted that this trend has already started this year. On the other hand, markets, particularly in the South and Midwest, will remain very much in demand and could see home prices increasing throughout the year.