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Skyrocketing interest rates through most of 2022 put some much-needed pressure on the housing market after home prices hit record highs across the nation. However, since December, mortgage rates have been on a steady decline through the beginning of February. Even so, many economists remain mixed about whether home prices will continue to decelerate throughout 2023—or even drop at all.
For one, the nation’s overall housing supply remains limited, as those who purchased homes in recent years at extremely low mortgage rates are staying put. In addition, new home construction fell again in December, adding to the longstanding inventory problem. Tight inventory has kept prices from substantially dropping off, making homes still unaffordable for many, especially first-time homebuyers.
Yet, even though home prices remain high year-over-year (YOY), they’re not as eye-popping as they were in early 2022. But how far home prices dip in 2023 will likely depend on where mortgage rates go.
Housing Market Forecast for February 2023
As we begin to move through 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.
Nevertheless, there are indicators that a housing market correction is underway. For one, mortgage rates are showing signs of ease, with rates now less than double what they were a year ago.
And after a couple of years of a meteoric rise, home prices seem to be coming down to Earth, albeit slowly, making it difficult for many homebuyers to access affordable housing.
The median existing-home sales price was up 2.3% to $366,900 in December compared to a year ago, according to the National Association of Realtors (NAR). Though this is the 130th consecutive month of YOY price increases—a record streak—the YOY increase was at a slower pace compared to November. Month-over-month existing-home sales prices continued their downward trend and are roughly 11% lower than their record high of $413,800 in June.
At the same time, total existing-home sales dropped 1.5% from November to December, marking the eleventh consecutive month of declining sales, and down 34% from a year ago, per NAR.
Despite all these mixed messages, some experts say that home shoppers have reason to be hopeful in 2023.
“Markets in roughly half of the country are likely to offer potential buyers discounted prices compared to last year,” said Lawrence Yun, chief economist at NAR.
Others expect increased sales activity as home shoppers trickle back this year, eventually leading to a full-on housing market resurgence.
“It seems we have already reached the bottom of the low home sales activity,” says Nadia Evangelou, senior economist and director of forecasting for the NAR. “And with mortgage rates stabilizing near 6%, we expect the housing market to turn around in 2023 … and rebound in 2024.”
Housing Inventory Outlook for February 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.
“December’s existing home sales report hit the losing trifecta of lower sales, lower inventory and higher prices,” says Robert Frick, corporate economist at Navy Federal Credit Union.
At the current sales pace, inventory is at a 2.9-month supply, according to NAR. This figure is down from 3.3 months in November, though up from 1.7 months in 2021.
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, with single-family construction starts up 11.3% in December, while applications for building permits declined by 6.5% from the previous month, according to preliminary data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
“More importantly, December 2022 housing starts for single-family homes were much, much lower than they were in December 2021: 909,000 this year compared to 1.338 million last year,” says Sharga.
Even so, the latest builder sentiment data reflected some cautious optimism, with builder confidence increasing for the first time after 12 consecutive months of declines. Though it was only a modest increase from 31 to 35, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report. 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.
When 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.
“After a big boom over the past two years, there will essentially be no change nationally” in home prices in 2023, said Yun.
However, some experts 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.”
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.
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.
Will There Be More Foreclosures 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 the Year-End 2022 U.S. Foreclosure Market Report published by ATTOM Data.
For December 2022, foreclosure starts were up 72% from a year ago, but down roughly 1% between November and December.
“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, in a report.
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 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 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.
Frequently Asked Questions (FAQs)
Will rising interest rates lower home prices?
Historically, rising mortgage rates don’t always lead to lower home prices. Rising interest rates tend to cause increases in home values to shrink. However, given that interest rates rose so quickly in 2022, it might still force home prices to come down further in 2023. Home price trends also depend on whether supply can keep up with demand.
What will happen if the housing market crashes?
Most experts do not expect a housing market crash in 2023 since many homeowners have built up significant equity in their homes. The issue is primarily an affordability crisis. High interest rates and inflated home values have made purchasing a home challenging for first-time homebuyers.
Is it smart to buy real estate before a recession?
If you’re in a financial position to buy a home you plan to live in for the long term, it won’t matter when you buy it because you will live in it through economic highs and lows. However, if you are looking to buy real estate as a short-term investment, it will come with more risk if you buy at the height before a recession.
Will house prices go down in 2023 usa? ›
Weaker sales data led to a downward revision in Zillow's price growth forecast for 2023. Zillow projects typical U.S. home values to fall 1.1% from November 2022 to November 2023. For the 12 months from December 2022 to December 2023, Zillow projects only a 0.7% decline in the Zillow Home Value Index.Will 2023 be a good time to buy a house? ›
The combination of persistent buyer demand and low inventory has driven property prices up. There are fewer sellers, so prospective buyers need to contend with higher housing prices. As such, if you buy a home in 2023, you're likely to pay a premium.Will prices go down in 2023? ›
In some categories there will be deflation, or an outright drop in price levels. In the charts below, these trends show up as a declining rate of year-over-year inflation toward the end of 2022. By the end of 2023, many and perhaps all of those charts will show negative year-over-year inflation, or deflation.Should I wait for the recession to buy a house? ›
Is Buying A Home During A Recession Worth It? In general, buying a home during a recession will get you a better deal. The number of foreclosures or owners who have to sell to stay afloat increases, typically leading to more homes available on the market and lower home prices.Will 2024 be a good time to buy a house? ›
The forecast for the housing market is expected to get gloomier next year before rebounding to 2022 levels in 2024. Fannie Mae's Economic and Strategic Research (ESR) Group forecasts single-family home sales to post 5.67 million in 2022 before dropping to 4.42 million in 2023 and then climbing to 5.25 million in 2024.Will mortgage rates go down to 3 percent again? ›
Still, rates probably won't return to levels seen during the early years of the pandemic. “People can't expect that we're going to go back to a 3%, 30-year fixed rate,” Cohn said. “Now that happened because of COVID and the pandemic, and we don't want to find ourselves in that position again.Will house prices go down in 2024? ›
Real estate experts, Capital economics expect that home prices and the rise in home prices, in general, will likely see a slowdown in 2023 and into 2024. This does not mean that we will see another great recession but that we will have a decline in investing and in the number of homeowners looking to sell their homes.Is it a sellers or buyers market 2023? ›
Finsum:While 2023 is expected to be a better year for real estate buyers due to more inventory, less competition, and lower mortgage rates, it will still likely be a sellers' market.Is 2025 a good time to buy a house? ›
13% expect the market to favor home buyers in 2025. While just 8% expect that to happen by sometime in 2026 or sometime in the next five years. Metros in the South and Midwest are the least likely to see price declines over the next year. Vacation market areas are most likely to see price declines.What will happen to property prices in 2023? ›
Both Lloyds and Halifax expect house prices to fall 8% in 2023, while Nationwide and online estate agent Zoopla are predicting falls of 5%. The Office for Budget Responsibility (OBR) expects prices to fall 9% over the next two years.
How far will house prices fall? ›
House prices will slump in 2023 as high mortgage rates crunch buyers' budgets and bring sales to a 12-year low, analysts have warned. From peak to trough, values will fall by 12pc, according to both Capital Economics and Oxford Economics research consultancies.Will 2023 be a year of recession? ›
2023 will be a year of global recession, but investment opportunities will arise from the continued desynchronization between the three largest economic blocs – the US, the euro area and China.Is a housing crash coming? ›
While the housing market on a national scale has seen prices decline since mid-2022 amid high interest rates, experts are noting that a sudden and abrupt housing market crash is unlikely, based on current market conditions.Is it better to have cash or property in a recession? ›
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.Will house prices rise in next 5 years? ›
House price predictions for 2023/2024
Capital Economics predicts the base rate to rise to 5% next year before dropping to 3.25% in 2024.
Falling house prices mean the cost of a typical home will drop from five times average household disposable income to 4.2 times in 2024, Mr Thompson said. “That would be the lowest ratio since 2015, marking a particularly opportune moment to enter the market.”What time of year is cheapest to buy a house? ›
Winter is usually the cheapest time of year to purchase a home. Sellers are often motivated, which automatically translates into an advantage to you. Most people suspend their listings from around Thanksgiving to the New Year because they assume buyers are scarce.What will my house be worth in 5 years? ›
How much will property prices rise in 5 years? Based on historical averages of 3.5% of home value growth per year, property prices will rise a total of about 18 to 20% in 5 years.How high will interest rates go in 2023? ›
In the past 12 months alone, the Fed has hiked rates seven times to combat rising inflation. As of January 2023, the federal funds rate is 4.43%. However, the FOMC predicts that it could continue to rise and peak at around 4.9% in 2023.Will mortgage rates go down in the next 5 years? ›
Mortgage rates are likely to fall even farther in 2023, housing economists predict. Greg McBride, CFA, Bankrate chief financial analyst, expects 30-year mortgage rates to drop to 5.25 percent by the end of 2023.
Will mortgage rates go down in the next 2 years? ›
Are mortgage rates expected to rise or fall during 2023? The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up. Some predict that fixed rates could fall below 4 per cent by early 2024.Is it better to buy a house in 2022 or 2023? ›
Home Prices Will Likely Drop
As interest rates have risen throughout 2022, home sales have seen a sharp decline. Fannie Mae has forecasted that total home sales will reach 5.64 million in 2022, an 18.1% drop from 2021; in 2023, that figure is expected to decline again to 4.47 million, a 20.7% decrease from this year.
Home Price Predictions
While it's quite possible for median home prices to fall another 5% in 2024 – or a total potential drop of about 10% from the end of 2022 – if mortgage rates decline faster than predicted, that could mean home prices remain mostly flat through the end of 2024.
Real estate experts, Capital economics expect that home prices and the rise in home prices, in general, will likely see a slowdown in 2023 and into 2024. This does not mean that we will see another great recession but that we will have a decline in investing and in the number of homeowners looking to sell their homes.What will happen to house prices over next 5 years? ›
House price predictions for 2023/2024
Capital Economics predicts the base rate to rise to 5% next year before dropping to 3.25% in 2024.
Rising rates make it more expensive to borrow money which means fewer potential buyers can afford mortgages. The Office for Budget Responsibility (OBR) predicts that house prices will fall 9% over the next two years before rising again in 2025.