Housing Market Predictions For 2023: Are Home Prices Becoming Affordable?

The declining mortgage rates trend that brought back some prospective buyers to the market in the first month of 2023 has ended—at least for now. Home sales prices responded by continuing their downward slide. However, many economists remain mixed about how much more home prices will drop this year.

Housing Market Predictions For 2023

For one, the nation’s housing supply remains limited. Those who purchased homes in recent years at record-low interest rates are staying put. Moreover, new home construction fell again in January, compounding the longstanding inventory problem. Tight inventory issues, in part, are keeping prices from dropping off, which is perpetuating affordability challenges for many, especially first-time homebuyers.

Though home prices remain high year-over-year, they’re not as eye-popping as they were in early 2022. Even so, how much further home prices dip in 2023 will likely depend on where mortgage rates go.

Housing Market Forecast for March 2023

As we move through the early part of 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. 

Yet, even as home prices appear to be coming back to Earth after a meteoric rise over the past couple of years, high interest rates coupled with appreciated home values still make it difficult for many prospective buyers to access affordable housing. 

“[H]ome prices remained 8.1% higher than the previous year which, coupled with mortgage rates up more than 250 basis points in the same time period, meant that buyers were still positioned to pay much more for a home than a year prior,” said Hannah Jones, economic data analyst at Realtor.com, in an emailed statement.

The median existing-home sales price was up 1.3% to $359,000 in January compared to a year ago, according to the National Association of Realtors (NAR). Though this is the 131st consecutive month of year-over-year price increases—a record streak—the increase was at a slower pace compared to December. Month-over-month existing-home sales prices continued their downward trend and are roughly 13% lower than their record high of $413,800 in June 2022. 

In the meantime, mortgage rates ticked up again, erasing much of the recent declines after hitting a 20-year high of 7.08% in the fall.

“Mortgage rates increased across all loan types last week, with the 30-year fixed rate jumping 23 basis points to 6.62%—the highest rate since November 2022,” said Joel Kan, vice president and deputy chief economist at Mortgage Bankers Association, in a press statement.

At the same time, total existing-home sales dropped 0.7% from December to January, marking the 12th consecutive month of declining sales, and down 36.9% from a year ago, per NAR. 

Despite the mixed messages some experts say that home shoppers have reason to be hopeful.

“While sales are still depressed from a year ago, this shows another crack in the housing market that should benefit potential homebuyers, especially when mortgage rates drop,” said Robert Frick, corporate economist at Navy Federal Credit Union, in an emailed statement.

Housing Inventory Outlook for March 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. 

At the current sales pace, inventory is at a 2.9-month supply, according to NAR. This figure is unchanged from December, though up from 1.6 months a year ago.

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.

At the same time, there are mixed signals in the homebuilding realm. Single-family construction starts in January were down 4.3% from December, and applications for building permits declined by 1.8% from the previous month, according to preliminary data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. 

That’s a sluggish start for new construction, and yet—the latest builder outlook data reflected optimism. 

The latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which tracks builder sentiment, rose seven points, from 35 to 42. 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.

Despite the tight inventory, we’re also in a window where buyers have a better chance to negotiate a deal due to sluggish sales keeping homes on the market longer. In some cases, buyers may find they’re able to nab a home at 10% off the original list price, according to NAR chief economist Lawrence Yun.

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.

“[H]ome prices will be steady in most parts of the country with a minor change in the national median home price,” said Yun. 

However, some housing market watchers 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.”

Yun concurs, noting that home prices will see gains or declines depending on the region, with lower-priced locations likely to experience price increases and expensive areas seeing dips.

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. 

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 Foreclosures Increase in 2023?

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 ATTOM Data’s Year-End 2022 U.S. Foreclosure Market Report

“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. 

For January 2023, foreclosures were up 36% from a year ago and up 2% between December and January.  

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.

When Should I Buy a Home 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.

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