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Housing Market Predictions for 2023

Skyrocketing interest rates put some much-needed pressure on the housing market after home prices hit record highs across the nation last year. While rates did level off through January, causing some homebuyers to re-enter the market, a recent uptick in rates suggests the market is going back to a standstill. Many economists remain mixed about whether home prices will continue to decelerate throughout 2023—or even drop at all.

For one, the nation’s overall housing supply remains limited, as those who purchased homes in recent years at extremely low mortgage rates are staying put. In addition, new home construction fell again in January—the fifth straight month of declines—adding to the longstanding inventory problem. Tight inventory has kept prices from substantially dropping off, making homes still unaffordable for many, especially first-time homebuyers.

Yet, even though home prices remain high year-over-year (YOY), they’re not as eye-popping as they were in early 2022. But how far home prices dip in 2023 will likely depend on where mortgage rates go.

Housing Market Forecast for February 2023
As we begin to move through 2023, housing experts maintain a watchful eye on the economy, which continues to be pulled in all directions by high inflation, steep interest rates, ongoing geopolitical uncertainties and recession fears, to name a few. Nevertheless, there are indicators that a housing market correction is underway. For one, mortgage rates are showing some signs of ease from reaching 20-year highs in late 2022. And after a couple of years of a meteoric rise, home prices seem to be coming down to Earth, albeit slowly, making it difficult for many homebuyers to access affordable housing.

The median existing-home sales price was up 2.3% to $366,900 in December compared to a year ago, according to the National Association of Realtors (NAR). Though this is the 130th consecutive month of YOY price increases—a record streak—the YOY increase was at a slower pace compared to November. Month-over-month existing-home sales prices continued their downward trend and are roughly 11% lower than their record high of $413,800 in June. At the same time, total existing-home sales dropped 1.5% from November to December, marking the eleventh consecutive month of declining sales, and down 34% from a year ago, per NAR.

Despite all these mixed messages, some experts say that home shoppers have reason to be hopeful in 2023.

“Markets in roughly half of the country are likely to offer potential buyers discounted prices compared to last year,” said Lawrence Yun, chief economist at NAR. Others expect increased sales activity as home shoppers trickle back this year, eventually leading to a full-on housing market resurgence.

“It seems we have already reached the bottom of the low home sales activity,” says Nadia Evangelou, senior economist and director of forecasting for the NAR. “And with mortgage rates stabilizing near 6%, we expect the housing market to turn around in 2023 … and rebound in 2024.”

Housing Inventory Outlook for February 2023
Low housing inventory has been a challenge since the 2008 housing crash when the construction of new homes plummeted. It hasn’t fully recovered—and won’t in 2023.

Housing supply remaining stuck at near historic lows has propped up demand compared to other downturns, consequently sustaining higher home prices.
“December’s existing home sales report hit the losing trifecta of lower sales, lower inventory and higher prices,” says Robert Frick, corporate economist at Navy Federal Credit Union.

At the current sales pace, inventory is at a 2.9-month supply, according to NAR. This figure is down from 3.3 months in November, though up from 1.7 months in 2021. Based on this and other data, industry experts have a gloomy outlook on when inventory will eventually normalize.

“I believe that we’re likely to see low inventory continue to vex the housing market throughout 2023,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data. And with 70% of homeowners sitting on a mortgage rate of 4% or less, Sharga says we’re unlikely to see an inundation of homes soon.

In fact, single-family housing starts fell 4.3% in January and building permits were down 1.8% compared to the previous month, according to latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).

But there may be a glimmer of hope.

Builder sentiment made a buoyant leap from 35 to 42, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) February report. This is the second month-over-month increase following 12 consecutive months of declines. Even so, builder confidence is still low—50 or above means more builders see good conditions ahead—so there will need to be more consecutive upticks before we see a significant rebound in new construction.

“The bottom line is that there really isn’t a likely scenario that leads to inventory levels approaching historically normal numbers in 2023, which means that prospective homebuyers are still going to have to work hard to find something to buy,” says Sharga.

Will the Housing Market Crash?
Due, in part, to the ongoing inventory problem keeping home prices elevated, many economists predict the housing market is more likely to correct itself from the double-digit percentage jumps seen in home prices the past few years rather than crash. “After a big boom over the past two years, there will essentially be no change nationally” in home prices in 2023, said Yun.

However, some experts believe that homes in some areas could see sales and price growth, particularly in locations where home prices have remained affordable over the past few years in relation to median income.

“We’re estimating about a 5% drop nationally,” says Sharga. “Some markets, believe it or not, will probably see prices continue to increase.”

Other experts point out that today’s homeowners also stand on much more secure footing than those coming out of the 2008 financial crisis, with a high number of borrowers having positive equity in their homes. Consequently, the likelihood of a housing market crash is low.

“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow. Bachaud also notes that mortgage products have become less risky.

“There are a lot more regulations and restrictions in the mortgage market that make it a lot stronger, and less volatile and less risky, than it was in the market after 2008,” she says.

In a housing market crash, you would typically see a 20% to 30% drop in home prices and a decline in home sales—far more than what’s currently happening. Another crash symptom that’s been missing is a jump in foreclosure activity. “I think we’re more likely to see the market cool, rather than crash,” Sharga says.

Will 2023 Bring More Foreclosures?
Even with the steady rise in foreclosures that resulted after the expiration of the Covid-19 foreclosure moratorium in September 2021, foreclosures remain below pre-pandemic levels. In 2022, foreclosures were down 34% compared to 2019, according to the Year-End 2022 U.S. Foreclosure Market Report published by ATTOM Data. For December 2022, foreclosure starts were up 72% from a year ago, but down roughly 1% between November and December.

“It seems clear that government and mortgage industry efforts during the pandemic, coupled with a strong economy, have helped prevent millions of unnecessary foreclosures,” said Sharga, in a report.

A key difference now compared to the 2008 housing crisis is that many homeowners, and even those struggling to make payments, have had a large boost to their home values in recent years. That means they still have equity in their homes and are not underwater—when you owe more than the house is worth.

Sharga noted that borrowers in foreclosure are leveraging the positive equity in their homes by refinancing their home or selling for a profit. “It seems likely that this is a trend that will continue in 2023,” Sharga said.

Should I Buy a House in 2023?
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in. Use a mortgage calculator to estimate your monthly housing costs based on your down payment and interest rate.

Trying to predict what might happen this year is not the best homebuying strategy. “Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed,” says Neda Navab, president of the U.S. region at Compass, a real estate tech company.

Navab expects home prices in the hotter markets during the past few years to decrease somewhat, but she doesn’t expect a widespread, national price decline like what followed the 2008 financial crisis.

Instead of waiting for much lower prices, experts suggest buying a home based on your budget and needs. If you find a home you love in an area you love, and it also fits your budget, then chances are it might be right for you. However, if you make too many sacrifices just to get a house, you may end up with buyer’s remorse, potentially forcing you to offload the house.

Tips for Buying in Today’s Housing Market
Start with a budget and stick with it. Even with a slight uptick in the number of homes for sale, buyers are still facing elevated prices and mortgage rates nearing 7%.

“The biggest thing right now is the disconnect between buyers and sellers,” says Rita Tayenaka, owner of Orange County, California-based Coast to Canyon brokerage. “Buyers want to lowball, and sellers want last year’s price.”

While buyers are getting a bit more breathing room now, they should keep in mind that it’s still a seller’s market while they consider their options.

Tips for Selling in Today’s Housing Market
The first step for a successful sale is to find a listing agent who knows the area and comes highly recommended. A good agent will work closely with you to price your home competitively while fielding questions and offers from prospective buyers.

Tayenaka points to the outsize number of homes falling out of escrow recently as a cautionary tale for sellers who continue to demand 2021 prices. “Everyone thinks their house is special,” she says.

Even though the market may still be tipped in your favor, it’s in your best interest to present your home in the best possible light. Not everyone has cash dedicated to renovations and repairs, but a little sweat equity can go a long way. The first step is to declutter, organize and clean. Even if your home is outdated, a clean space gives buyers a chance to envision the house’s potential.

Robin Rothstein & Rachel Witkowski, Forbes ADVISOR