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Originally Published: Dec 23, 2022
Originally Published: Dec 23, 2022 Last Updated: Mar 02, 2023 9 min read
Illustration of a man looking through binoculars, where the lenses are shaped like houses and one is in ascending form and the other descending
Sam Island for Money

The last three years have been a whirlwind with the housing market going from scorching hot to icy cold in what seems like the blink of an eye. So what does the housing market have in store for us next year?

In 2023, the most important factor to watch will be what happens in the broader economy. Will inflation continue to abate? Will there be a recession or will the Federal Reserve deliver a so-called “soft landing”?

These are questions every expert we spoke to considered when making their forecasts for next year. All were optimistic that, even though there will be an economic downturn, we may manage to avoid a deep recession. And though the full picture may not be rosy, it does mean a much less hectic housing market.

“The last few years [we’ve] ping-ponged between a really aggressive market and a cooling market,” says Taylor Marr, deputy chief economist at Redfin. “With more economic stability, that really could bring more overall balance to the market.”

1. Homes sales will slide

In 2020 and 2021, record low interest rates, double-digit home price increases, low inventory and bidding wars galore had buyers in a frenzy. This year, skyrocketing mortgage rates, rising monthly payments and loss of buying power have brought the market to a near standstill.

The slowdown in sales that began in February 2022 will continue into next year as buyers contend with comparatively high mortgage rates, low inventory and still high home prices.

According to the experts we talked to, sales are likely to remain sluggish heading into the spring buying season before picking up during the latter half of the year. The only question seems to be how large of a decline to expect. Estimates range from 7% year-over-year, according to the NAR, to as much as 16%, according to real estate brokerage Redfin.

The determining factors of just how much sales will fall include what happens with mortgage rates, housing supply and overall economic conditions. If inflation moves lower and the Federal Reserve eases off its rate hikes, for example, homebuyers may feel things are stable enough to jump back into the market and sales may not slide as much.

Other factors like the strength of the job market, wage growth and consumer confidence could also mitigate the sales slowdown.

2. Mortgage rates are likely to pull back

After increasing to a 20-year high of 7.08% in early November, mortgage rates have been on a downward path in recent weeks — a trend that is likely to continue in 2023.

High mortgage rates combined with high home prices have made a home purchase much less affordable this year as monthly payments increased by more than 50%. Any improvement in rates is welcome news to weary buyers.

Our experts believe that mortgage rates will likely remain relatively high during the first few months of the year but then edge lower and stabilize, with rates falling below 6% by the end of the year. Lawrence Yun, chief economist at NAR, for example, thinks the 30-year mortgage rate will end 2023 at around 5.5%.

“I think the peak has already occurred and we are on a downward path,” said Yun, during the Real Estate Forecast Summit.

But don’t expect rates to fall back to 3% either, he added. The conditions that made those ultra-low rates possible in 2020 and 2021 — a pandemic and unprecedented actions by the Federal Reserve to keep the economy from collapsing — aren’t likely to repeat any time soon.

Instead, there are signs that rates have room to fall from their current level. Skylar Olsen, chief economist at listing site Zillow, points to falling rent prices, a major component of the Consumer Price Index, as a reason for optimism around lower rates. As these decreases work their way into inflation readings, Olsen believes the Fed will go lighter in its short-term rate hikes moving forward.

“That’s one big reason why I think mortgages can come down or at least stay where they are and not keep bopping around,” says Olsen, who also sees rates dropping to around 5.5% next year.

3. Home prices will level off

While experts are in agreement that mortgage rates are likely to fall, there is a bigger disparity when it comes to home prices. Our experts’ forecasts range from prices falling 4% to a price increase of more than 5%.

The only near certainty is that there won’t be the double-digit price increases that have been the hallmark of the pandemic market.

Both Marr and Olsen see prices falling in 2023. Marr is forecasting a 4% drop in the median home price compared to 2022, while Olsen expects a more modest 0.5% decline. Yun thinks prices will stay flat.

On the other hand, Danielle Hale, chief economist at Realtor.com, believes low inventory will keep home prices from falling too far. She thinks prices will tick higher during the first few months of the year before leveling off or going negative after mid-year, ending the year up by 5.4% overall.

“Even though we’ve seen a pullback in demand, we’ve seen a very similar sized pullback in supply,” says Hale.

4. Inventory will remain tight

One of the biggest causes of skyrocketing home prices during the pandemic was a lack of housing supply. Next year will see an improvement, but inventory will remain below normal levels.

Currently, there is an equivalent of 3.3 months' supply of existing homes available for sale, according to NAR. Inventory is expected to increase by nearly 23% in 2023. That’s primarily because homes won’t be selling as fast, rather than due to sellers bringing new listings to the market.

The pace of sales has slowed considerably from the days when most sellers made deals in a week or less. Olsen sees the average time on the market doubling from 11 days in 2022 to 22 days next year, which will allow the housing supply to build up.

Buyers and sellers could return as 2023 progresses, especially if mortgage rates move lower. As borrowing conditions ease, more buyers will come back to the market, which should lure sellers back as well, notes Marr, who is already seeing an uptick in inventory.

“I think that trend will continue as the market softens,” says Marr. “We’ll continue to see a build-up of inventory in the spring.”

Still, even as supply improves, the number of homes on the market will remain below pre-pandemic levels. Though it may feel like there are more homes for buyers to choose from, inventory will remain tight.

5. There will be more variability between markets

“Hot” was the most common word used to describe the majority of real estate markets as recently as the first few months of 2022. That will no longer be the case going into 2023, as different metros will start to see differences in demand.

“For the last couple of years we could have talked about all housing markets across the country basically using the same language,” said Lisa Sturtevant, chief economist at listing site Bright MLS, speaking at the National Association of Realtors Real Estate Forecast Summit in December. “In 2023, though, there’s going to be a lot of variability in how these markets are adjusting.”

The “Zoom towns” — cities that attracted a large number of pandemic buyers who had shifted to remote work and were looking for more affordable housing — are the metros most likely to see home prices fall significantly, a trend that has already started this year, according to Sturtevant.

However, there will be markets, particularly in the South and Midwest, that remain very much in demand and could see home prices increasing throughout the year.

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