Housing Market Predictions for 2023

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Market Trends

We’re rounding the corner on 2022 and quickly heading toward a new year. That makes this a perfect time to prognosticate real estate matters for 2023. With mortgage rates escalating higher, home sales — and, in some areas, home prices — hitting the brakes, and increased uncertainty felt throughout the market, many homeowners, prospective sellers and prospective buyers are nervous about next year.

And for good reason. Consider that, at the time of this writing, the average 30-year fixed-mortgage rate is 7.04 percent. The inflation rate is an alarming 8.2 percent. And sales of previously owned homes dropped 1.5 percent in September from August to a seasonally adjusted annual rate of 4.71 million units, per the National Association of Realtors, which means that existing homes are selling at the slowest pace observed in 10 years.

We reached out to several industry experts, each of whom offered interesting forecasts and projections about where mortgage rates, home prices, buyer competition, housing supply, sales activity and home affordability are headed in 2023. Curious what the pros think? Read on for their evaluations and predictions.

Will mortgage rates continue to climb?

With interest rates roughly doubling from their lows in early 2022, it’s a fair assumption that the cost of financing a home won’t be coming down this year. But how about across 2023? Is there any light at the end of this dark tunnel?

Some say no. “Continued inflation, overall higher interest rates, a potential recession, and geopolitical tensions will force 30-year and 15-year mortgage rates up throughout 2023 and will bring the two rates closer together as short-term risks rise,” cautions Dennis Shirshikov, a strategist at Awning.com and a professor of economics and finance at City University of New York, who foresees the 30-year and 15-year benchmark mortgage loans averaging 8.75 percent and 8.25 percent, respectively, across 2023.

Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, shares some of those sentiments.

“By the end of 2023, financial market participants expect that the Fed will have increased the target Fed funds rate by 175 to 200 basis points from current levels. That would translate into 30-year and 15-year mortgage rates at roughly 8.50 and 7.70 percent,” he says.

Rick Sharga, executive vice president of Market Intelligence for ATTOM Data Solutions, which analyzes real estate and property data, is more hopeful. He posits that rates peak at about 8 percent and 7.25 percent for 30-year and 15-year loans in early 2023, “then gradually come down over the course of the year somewhat to hang in the range of 6.0 percent and 5.25 percent, respectively. This is entirely dependent on the Federal Reserve’s ability to get inflation under control and ease up on its aggressive rate increases.”

Three different roads for interest rates

Nadia Evangelou, senior economist and director of Real Estate Research for the National Association of Realtors, meanwhile, envisions three different rate scenarios occurring next year.

“In scenario #1, inflation continues to remain high, forcing the Fed to raise interest rates repeatedly. That means mortgage rates will keep climbing, possibly near 8.5 percent. In scenario #2, the consumer price index responds more to the Fed’s rate hikes, and there is a gradual deceleration of inflation, causing mortgage rates to stabilize near 7 percent to 7.5 percent for 2023. In scenario #3, the Fed raises rates repeatedly to curb inflation and the economy falls into a recession. This could cause rates to likely drop to 5 percent,” she explains.

Will housing sales decline?

Each of Evangelou’s three scenarios for mortgage rates would have a major impact on home sales. In each case, sales will be down — it’s just a question of how much.

“Higher rates under scenario #1 could cause home sales to drop by more than 10 percent next year,” she continues. “In scenario #2, home sales drop by 7 percent to 8 percent. And in the third scenario, home activity may also drop further by more than 15 percent.”

Our other experts agree: The slowdown in home sales that’s been occurring all year will continue into 2023. Sharga believes existing home sales in 2023 will slow, likely hovering in the 4.5 million range, with new-home sales at around 600,000.

Listings may no longer go at a lightning-fast pace, either. “Days on the market have been climbing back toward more normal levels recently, and we could see them approach 30 days or more in 2023 as the market continues to cool down,” he says.

Shirshikov is sympatico with those sentiments. “The average days on the market will increase somewhere between two and three times the current levels,” he notes.

What will happen to home values?

Interestingly, due to low inventory, “home prices won’t drop in 2023,” Evangelou predicts. “I expect pricing to be relatively flat, increasing by only 1 percentage point.”

Johnson, though, feels that higher interest rates will undoubtedly hurt home values and pricing. “A soft real estate market with prices at levels lower than current levels will result,” Johnson says.

That’s not great news for sellers, but welcome news for house-hunters.

“There are plenty of potential buyers still patiently waiting to enter the market. Assuming home prices ease, you’ll start to see some of these buyers emerge, especially the all-cash or lower loan-to-value purchasers who are less impacted by any interest rate concerns,” explains Scott Krinsky, a partner in the  Residential Banking Department of Romer Debbas, a Manhattan real estate law firm.

Home values on a national level are almost certain to decline at least modestly, perhaps between 5 percent and 10 percent, according to Sharga.

“Some of the more expensive markets will potentially see larger declines. Limited inventory, strong credit quality among current mortgage holders, and demand from young adults looking to become homeowners should help prevent prices from falling even further,” continues Sharga.

Will 2023 be a buyer’s market or a seller’s market?

For two years, it’s been a seller’s market. Will 2023 favor buyers or sellers more in most markets? Greg McBride, chief financial analyst for Bankrate, says “affordability issues and economic worries will depress home buyer demand, and inventory of homes available for sale will remain limited. So it’ll continue to be more of a balanced market than tilting one way or the other.”

Krinsky expects leverage to vary nationally, depending on the type of market.

“With the pandemic, we saw a new spike of bidding wars in suburban and smaller markets, likely because of the desire for more space and the increased flexibility of remote working across the country,” says Krinsky. “Now that many offices and businesses are back near full capacity and fully operational, the hope is that larger markets can revert back toward pre-pandemic levels and we will see increased demand there.”

Johnson, on the other hand, anticipates sellers holding fewer cards. “It will be a buyer’s market next year, as many reluctant sellers – those waiting for the market to turn around – will likely capitulate, adding to more housing supply,” he says.

Will housing inventory increase?

A shortage of homes has helped fuel the frenzied market of the last few years. But experts differ on housing inventory projections for 2023.

“Before the housing crash of 2008, inventory peaked at about a 13-month supply – twice what we would see in a healthy market,” Sharga says. “Today, we have about a three-month supply, which is about half of what we need. Current homeowners are unlikely to trade in their 3 percent mortgage for a new home with a 7 percent loan unless they absolutely have to, so existing home inventory should remain low. And builders have scaled back on housing starts for the past three months. That means we are not likely to see a huge boost in supply from new construction anytime soon, either.”

But others foresee increased supply next year. “Housing inventory will rise throughout 2023 as homes become more unaffordable due to high rates,” Shirshikov thinks.

Will homes be more affordable?

Will homes continue to remain financially out of reach for many purchasers next year, or will matters be better for buyers?

“If inflation pressures ease and we see a meaningful pullback in mortgage rates next year, this will ease some of the strain on buyers – but only a bit,” explains McBride. “Prices will remain fairly steady, and in a lot of markets that’s a price that is 40 percent or more higher than pre-pandemic.”

“Home prices will not fall proportionally,” Shirshikov thinks. Any “fall in prices will not be enough to offset the rising interest rate and its contribution to the monthly [mortgage] payment.” As a result, homes may even seem less affordable, he says.

The impact of higher mortgage rates and lower home prices in 2023 will likely cancel each other out to a great extent, Johnson agrees. His take: “Overall home affordability won’t change dramatically.”

The bottom line on the 2023 housing market

Taking a big-picture look at the possible real estate market next year, most pros are in consensus: something of a transitional year, characterized by uncertainty.

“The housing market will be tepid in 2023, with only lukewarm demand and a limited amount of inventory available for sale,” McBride predicts. However, “mortgage rates could pull back meaningfully next year if inflation pressures ease.”

“The hope is that, as supply and demand within the housing market normalizes, interest rates can start to come back down to earth,” Krinsky agrees. “Until this happens, those who simply cannot afford the costs of borrowed money will have to continue to wait. For those waiting on the sidelines holding out hope that rates may soon drop, they might have to accept the fact that the lower-rate financing windows open in 2020 and 2021 have closed.”

But if mortgage rates don’t move much, “that means borrowers will pursue fewer purchase loans and we will see a continuing decline in rate-based refinance activity,” Sharga reiterates. “With more homeowners staying in place, we also might see an uptick in home equity loans and home equity lines of credit over the course of the year.” In other words, if moving will be out, remodeling may well be in.

Written byErik J. MartinContributing writer

Read more from Erik J.
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.