Rising home prices and inventory shortages fueled a strong seller's market for most of 2022. But some experts say 2023 could bring a "nobody’s market"— one not particularly favorable to home buyers or sellers.
The latest trends and predictions indicate a slowdown in home sales due to rising mortgage rates, as buying power for prospective home buyers declines. As a result, both buyers and sellers should adjust their expectations as the housing market slowly course-corrects after a bumpy year.
Here are five predictions for where the real estate market is headed in 2023:
Mortgage Rates Will Remain Elevated
Mortgage rates dropped to historic lows in 2021 (around 3%), which translated to lower monthly payments, helping home buyers combat rising prices. By October of 2022, however, mortgage rates for a 30-year home loan had doubled, surging to 7.08% as the Federal Reserve continued to raise interest rates in response to rising inflation.
In 2023, it's safe to expect mortgage rates to remain high, at least through the first half of the year. How high? Some experts predict rates in the 6% range before dropping to an average of 5.4% by the end of the year, while the National Association of Realtors (NAR) predicts rates will hover around 7.1% or slightly below for much of 2023.
In either case, higher-than-average mortgage rates could translate to reduced buying power for those looking to purchase a house. The average monthly mortgage payment is now $2,430 — up 28% from 2022 — leaving many home buyers priced out of the market.
Housing Inventory Will Be Tight
The 2023 housing market is kicking off the new year with a 67% increase in housing supply compared to the start of 2022. But those inventory levels are still well below pre-pandemic numbers. Housing supply remains relatively tight as fewer homeowners are willing to sell because of higher-than-average mortgage rates.
Still, optimistic buyers might feel like they have more to choose from in 2023 as homes are likely to sit longer on the market, rather than being snapped up in a matter of days. If mortgage rates soften as the year progresses, buyers who were biding their time on the sidelines may decide to get back in the game, encouraging more sellers to move forward as well.
Although some experts predict housing inventory could increase by as much as 22.8% in 2023, inventory will remain tight compared to the historic average.
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Home Prices Could Increase…or Decrease…or Remain Flat…
There are mixed signals and varying opinions from market experts as to whether home prices will continue to rise (just not as quickly as they have in the last two years), decline, or remain relatively flat. Some experts are predicting home prices to fall as much as 4% in 2023, while others say they could rise up to 5%.
NAR analysts predict home prices to increase by a modest 0.3% compared to 2022, which would bump the median home price to $385,800. Some parts of the country may see small price increases while others may see small declines.
Other analysts expect home prices to level off. Although prices remain high, they’re not increasing at the same double-digit rate of previous years. The national median existing-home price in October of 2022 was $379,100, an increase of 6.6% from October of 2021. Compare that to the 13% increase in median home prices from 2020 to 2021.
Still, other experts believe that home prices will continue to rise (up to 5.4%), but at a slower rate than before, kept in check by high mortgage rates, low inventory, and buyers and sellers playing “wait and see” before making a move.
Fewer Homes Will Sell
Even if prices decline in 2023, it’s expected that fewer homes will sell overall thanks to elevated mortgage rates, reduced buying power, and limited inventory. The sluggish sales trend that began in 2022 is expected to continue into the first half of 2023, but sales may perk up in the second half of the year.
Some forecasts predict that home sales will drop to 3.9 million in 2023 (down from 5.03 million in 2022) before rebounding to 4.6 million in 2024. While fewer first-time home buyers are in a position to purchase due to limited affordability, the more influential factor in falling home sales is current owners' hesitancy to sell.
Many homeowners already have a fixed-rate mortgage locked in at a much lower rate than current market standards, and are therefore disinclined to sell their home only to purchase a new one with a much higher mortgage rate.
Other factors that could influence the sales slowdown include consumer confidence, job and wage growth, and whether inflation softens later in 2023.
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New Construction Will Continue to Stall
Builders will continue to scale back new home construction, with NAR forecasting housing starts to drop by double digits in 2023, particularly in pandemic boom areas like Arizona and Texas, where developers overbuilt.
Builder confidence has dropped as mortgage rates rise and the buyer pools evaporate. More than 59% of builders have reported using incentives like mortgage rate buydowns and price cuts to ease mortgage strain for potential buyers.
Labor and land shortages continue to plague builders. Although some material costs such as lumber have softened, overall construction costs are hovering about 14% higher due in part to shortages in other supplies, such as steel.
Signs point to the U.S. housing market slowing down and course-correcting — albeit slowly — in 2023 and into 2024. Higher mortgage rates, inflation, and economic uncertainty have put the brakes on the home-buying frenzy of the last two years, and neither buyers nor sellers will have the upper hand.