Housing Market Predictions For 2023: Will Home Prices (Finally) Fall?
Surging mortgage rates have put some much-needed pressure on the hot housing market in recent months after home prices hit record highs across the nation. But as mortgage rates have begun to decline in recent weeks, many economists are mixed about whether home prices will continue their slow decline through 2023–or crash.
The nation’s overall housing supply remains limited, as those who purchased homes in recent years at extremely low mortgage rates are staying put. This tight inventory has kept prices from seeing deeper declines, making homes still unaffordable for many, especially first-time homebuyers.
Even though home prices remain high year-over-year, they’re not as eye-popping as they were earlier this year. How far home prices dip in 2023 will likely depend on where mortgage rates go.
Housing Market Forecast Into 2023
Many housing insiders warn buyers against trying to time the market as the economy wades through its current period of uncertainty.
“Deciding to buy now or wait is going to depend on the individual buyer’s motivation and situation. Waiting may not be a viable option,” says Krista Forsberg, a real estate agent at Keller Williams Realty in Edina, Minnesota. “Even if a buyer can push pause on buying to later in the year or 2023, there isn’t likely to be significant improvement in prices or interest rates.”
As we approach the end of 2022, housing experts maintain a watchful eye on the economy, which is still being pulled in all directions by stubbornly high inflation, steep interest rates, ongoing geopolitical uncertainties and the midterm election results, to name a few.
After a couple of red-hot years for the housing market, there are indicators a correction is underway, but it’s been slow-going. Mortgage rates are still more than double what they were the first week of 2022 and home prices are more than 6% higher than a year ago, making it harder for would-be buyers to access affordable housing.
The median existing-home sales price was $379,100 in October, up 6.6% from a year ago but down from the record high of $413,800 in June, according to the National Association of Realtors (NAR). Still, the higher housing costs have taken a toll on home shoppers as mortgage applications are at their lowest level in 25 years, according to the Mortgage Bankers Association (MBA).
Total existing-home sales dropped 5.9% from September to October, marking the ninth consecutive month of declining sales, as home shoppers were “squeezed out of qualifying for a mortgage,” said Lawrence Yun, NAR’s chief economist, in the report.
But that could turn around soon.
“Mortgage rates have come down since peaking in mid-November, so home sales may be close to reaching the bottom in the current housing cycle,” said Yun.
Housing Inventory Predictions for 2023
Low housing inventory has been a challenge since the 2008 housing crash when the construction of new homes plummeted. It has never fully recovered.
Housing supply that remains near historic lows has held up demand compared to other downturns, consequently sustaining higher home prices.
“Inventory levels are still tight, which is why some homes for sale are still receiving multiple offers,” Yun said.
At the current sales pace, inventory is at a 3.3-month supply, according to NAR.
“[This] is about half of what we’d like to see normally,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data. “And we still have pent-up demands based on demographic trends.”
Housing inventory is up slightly from 3.1 months in September and 2.4 months a year ago, according to NAR.
In the meantime, the ongoing slowdown in new construction is squeezing the already limited housing supply. Single-family construction starts and applications for building permits in October were down 6.1% and 2.4%, respectively, from the previous month, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
When Will the Housing Market Crash?
There are mixed signals from economists about if and when the housing market will crash, or if it will simply “correct” itself from the double-digit percentage jumps seen in home prices the past year.
“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 stand on much more secure footing than those coming out of the 2008 financial crisis, so 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.
Are a Lot of Foreclosures Coming?
While there hasn’t been a significant jump in foreclosures to date, foreclosure starts have been on a steady quarterly rise since the federal government ended the Covid-19 foreclosure moratorium in September 2021. Foreclosure starts were up roughly 1% in the third quarter from last quarter, and 167% from a year ago, coming within range of what they were pre-pandemic, according to ATTOM Data Solutions.
“We’re still running at about half of normal levels of foreclosure activity,” Sharga says. He doesn’t expect we’ll return to “normal” levels until around mid-2023, depending on whether there’s a recession.
A key difference now compared to the last 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.
“(E)ven as the foreclosure moratorium was lifted…we didn’t see a huge flood of foreclosures because people have so much equity,” says Bachaud.
Should I Buy a Home Now or Wait Until 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 next 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 at Compass.
Navab expects home prices in some expensive markets and other areas that saw substantial price gains over the past few years may decrease somewhat, but she doesn’t expect a widespread, national price decline like that of the 2008 financial crash.
So, instead of waiting for much lower prices, buy 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 and an expensive albatross you might have to offload.
Tips for Buying in a Hot 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 a Hot 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.
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