What to watch for in the housing market in 2023 

Amid a housing market plagued by high mortgage rates, inflation woes and recession fears, housing prices in the U.S. are expected to fall next year, though the market isn’t likely to see a jump in buyers as a result. 

Forecasters indicate 2023 could see a continued slowdown in housing sales even as home prices drop due to issues with overall affordability.

A big hurdle for new home buyers will be the higher mortgage rates. 

Thirty-year fixed mortgage rates went up from about 3 percent to around 7 percent this year, according to economists, as the Federal Reserve upped interest rates in a bid to slow inflation.

While that has contributed to falling home prices, it has also made it tougher for people to buy homes — especially as families also deal with rising costs for food, gas and other necessities. 

“That’s a lot more money you have to pay out every month, between a 3 percent interest rate and a 7 percent interest rate. It’s a significant chunk of change you have to pay out, even when the housing prices go down,” said Dennis Shea, the executive director of the J. Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center.

Though mortgage rates are up over the last year, they have been falling in recent weeks, and the Mortgage Bankers Association predicts 30-year mortgage rates will drop to around 5.2 percent by the end of 2023. Other forecasters like Redfin and Realtor.com are also predicting that mortgage rates will likely fall slightly.

Fed Chairman Jerome Powell has also indicated that the central bank will scale back on its interest rate increases, which could help settle the market. 

Still, for many people trying to buy a home, the mortgage payment will be daunting. 

“Right now, you see home prices declining … so you’ll probably continue to see that going forward. But affordability is still a major, major problem,” said Shea. “Wages have not kept pace with the housing market. Over the past year, you see mortgage rates have gone up dramatically, and that has priced many buyers out of the market.” 

The tumultuous economy isn’t just making it harder for new buyers to enter the market. It’s also making it more difficult for people who already own homes to buy new ones. 

For example, a couple who bought a home five years ago on a low fixed mortgage rate may have a desire to move to a larger home with room for children. But that couple now would be hit with a much larger mortgage rate in purchasing the new home, which could make moving more difficult. 

People in the housing industry describe it as the “mortgage lock-in” effect: Homeowners with existing fixed-rate mortgages stay put to avoid higher payments. 

Realtor.com forecasts home prices are likely to slow and could potentially decline, though the stabilization could take several years, while Redfin predicts the median home sale price will drop by around 4 percent next year and that the market will see 16 percent fewer home sales next year than in 2022, a fall to the lowest level since 2011.

“Prices would fall more if not for a lack of homes for sale: Redfin expects new listings to continue declining through most of next year, keeping total inventory near historic lows and preventing prices from plummeting,” the company said in a release on its 2023 outlook.

Lower prices don’t necessarily mean the market will get cheap enough to beckon in a surge of buyers.

Current and prospective homeowners are both under economic strain in other areas of their budget — with inflation keeping prices at the pump, in the grocery store and elsewhere high.

Economists for the most part haven’t yet made a call about whether the country is in a full-blown recession, but the National Association of Home Builders (NAHB) says the housing market is already there.

“We went from an incredibly hot housing market in 2021 to one that’s cooling off really rapidly in 2022. … By the time we got to July, we declared that housing is in recession,” said NAHB chief economist Robert Dietz, adding that the price declines are “bad news.”

What’s more, the country is still facing a housing deficit.

“There’s just not enough housing stock, both for rent and for sale, to meet demand, and that is sort of pushing against significant housing price drops,” Shea said.

The good news is that things may look up heading toward 2024 — especially if the Fed eases up significantly on rate hikes. 

“Affordability is going to be the biggest factor in housing for 2023, but there’s room for optimism on that front if mortgage rates recede,” said Zillow chief economist Skylar Olsen in a statement. 

“Where costs are lower, we’ll see healthier sales and inventory levels. If rent is less expensive than a new mortgage, we’ll see increased demand for rentals,” Olsen said. 

Many would-be homebuyers are turning toward renting. Redfin and Zillow predict rents will fall in 2023 and that builders will put new focus on rental properties.

The NAHB predicts a continued decline next year for single-family home construction, and Zillow also forecasts that more people next year may pool funds together to purchase a home with family or a friend who isn’t their spouse. 

“It will be a challenging year for both buyers and sellers, but an important one in setting the stage for home sales to return to a sustainable pace over the next two to three years,” Realtor.com chief economist Danielle Hale said in the company’s 2023 forecast. 

The housing market, which tends to be more sensitive to changes in monetary policy, will likely lead the business cycle next year as an indicator of any potential rebound pushing into 2024. 

“By the time you get to the end of 2023, our macro forecast is that one of two things will happen. Either the Fed will have accomplished its tasks with respect to inflation, and be in a position to ease — or the Fed will have overcorrected, producing recession, in which case it will be forced to ease because it has to watch inflation as well as the labor market,” Dietz said.

Dietz predicts the housing market will rebound in 2024, even if the rest of the economy doesn’t appear to be doing the same.

“The unemployment rate will probably still be elevated, but we will see a pickup in single-family home building, single-family buying demand, as mortgage rates fall back, and housing will help provide some of the momentum for the overall economy into ’24,” Dietz said, forecasting that the housing deficit will be reduced between 2025 and 2030.