Homebuyers might have an easier time in 2023 than they’ve had in late 2022, with mortgage rates and home prices both perhaps heading down.
One problem: Buyers might be chasing fewer houses for sale.
“We still have a fundamental supply shortage in the United States,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.
As home sales decline nationwide, prices are starting to dip – but not enough to make up for elevated mortgage rates.
Experts say mortgage rates are unlikely to return to pre-pandemic levels even as inflation cools. Instead, over the course of 2023, experts predict mortgage rates to fall in line with historical norms – between 3% and 7%. They’re already on the way there.
As we round the final bend of 2022, prospective homebuyers are wondering what next year has in store for them. We talked to several experts about their housing market predictions for 2023.
Here’s what they had to say:
Where Experts Predict the Housing Market Is Headed
Odeta Kushi, deputy chief economist at First American Financial Corporation
“During the spring, we’ll probably see a bump in home sales, but it will really depend on affordability and purchasing power. I do think we’ve seen the majority of the detrimental impact on purchasing power, based on falling prices. I think we can expect to see prices continue to fall from peaks going into next year, which should help buyers.
Jamie Hopkins, managing partner of wealth solutions at Carson Group
“I would not expect a big drop in house prices, but more of a leveling. I don’t think there’s enough people who will be forced to sell in the next year that would drive prices down significantly. Home sales and inventory will slow down before we see a big drop in values.”
Derrick Nutall, vice president on Citi mortgage’s community lending team
“When we talk about rate hikes, the other side we need to pay attention to is the rebalancing of the market. Right now, we’re estimating rates to come down in 2023, as well as the average cost of a home. All of that signals opportunity.”
How Inflation Will Impact the Housing Market in 2023
Inflation defined the housing market in 2022 and it’s likely to do the same in 2023, experts predict.
In response, the Federal Reserve has hiked its benchmark short-term rate, the federal funds rate from zero to 4.25% in less than a year. Most recently, the Fed announced a 50-basis-point increase, a step down from four consecutive hikes of 75 basis points.
The Fed, through its rate hikes, is intentionally trying to slow the economy. By making the cost of borrowing money more expensive, the Fed is encouraging consumers to save rather than to spend. While mortgage rates don’t track changes to the federal funds rate, they do respond to inflation, which, over the past two months, has waned.
However, inflation is still well above the Fed’s target of 2%. Though the Fed has been aggressively hiking rates for most of 2022, it may take months for the effects of their actions to trickle through the economy. The housing market, though, tends to be one of the first indicators as to what inflation is doing.
“[The housing market] has a bit of a domino effect on the economy,” Kushi says. “Less demand in the housing market prompts sales to fall. This causes home builders to pull back so production falls. Then, demand for commodities and durable goods begins to fall. Those economic contractions tend to spread throughout the economy, and the Fed is hoping that the domino effect will help to rein in inflation.”
While home prices and mortgage rates were hit first by inflation, experts say they may also be the first to signal inflation coming down.
Why the Housing Market Needs to Rebalance
For the past two years, the housing sector has been red hot. While home sales tend to drop off near the holidays, the current slowdown has more to do with rising interest rates than seasonal shifts.
According to data from Zillow, the number of new listings fell 35.1% year-over-year in October, highlighting weakened demand and affordability challenges. Homes are also staying on the market for longer, a stark contrast to the extreme seller’s market of the past two years. While we’re not in a buyer’s market yet, experts say this slowdown is a sign that the housing sector will stabilize closer to normal levels in 2023.
As a result of lingering supply-chain issues, home prices appreciated at unsustainable levels in 2021, reaching their peak in May 2022. However, consumers were still able to afford those prices on account of historically low mortgage rates. As the Fed’s rate hikes began to trickle through the economy, though, those rates rose significantly.
“One of the main factors contributing to inflation in the past year has been housing growth,” says Denis Poljak, co-founder of Poljak Group Wealth Management. “By slowing down the growth of the housing sector, [the Fed] wants to slow the growth of the index sector as a whole.”
Just as the housing market needs to rebalance, experts say consumers will need to adjust their expectations when it comes to mortgage rates. A return to the low interest rates of the pandemic is unlikely. In fact, experts say it was those low rates that played a role in creating the inflationary environment the economy is in today. Historically speaking, mortgage rates in the 6% to 8% range are normal. Rates in the 3% range were the exception to the rule.
“Yes, mortgage rates are higher than before, but rate hikes from the Fed are serving to really position the housing market back to where it should be on a historical basis,” Nutall says.
As supply and demand fall more in line with one another, affordability will normalize.
“We should hopefully see inflation start to recede into next year and then we should see a housing market that begins to normalize in the second half of next year,” Kushi says.
What the Federal Reserve Means for Mortgage Rates
Mortgage interest rates don’t move in lockstep with the Fed’s actions in the same way that, say, rates for a home equity line of credit (HELOC) do. But, they do respond to inflation. As a result, cooling inflation data and positive signals from the Fed will influence mortgage rate movement more than the most recent 50-basis-point rate hike.
Fed Chairman Jerome Powell said in a recent speech, “We are seeing the effects on demand in the most interest-rate sensitive sectors of the economy, such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Inflation will remain the Fed’s top priority in 2023. However, Powell signaled that a slower pace of rate hikes may be appropriate if inflation data continues to show progress being made. This is good news for mortgage rates and the housing market at large.
“With the Fed raising rates, there are additional challenges for homebuyers. That can’t be ignored. But on the other hand, those increases are helping to rebalance the market,” says Derrick Nutall, vice president on Citi mortgage’s community lending team.
What Will Mortgage Rates Do in 2023?
Predictions as to what mortgage rates will do in 2023 vary depending on who you ask. Without a crystal ball, it’s difficult to predict what direction mortgage rates will move. However, the general outlook is cautiously optimistic.
The Fed downshifted to a 50 basis point increase in their December meeting, but have warned that keeping rates at a higher level for longer will be necessary. As a result, upward pressure on mortgage rates won’t ease entirely.
“While the pace may slow down, I don’t think the Fed is going to stop until they see inflation come down to their goal. We’ve just got to expect that,” says Jamie Hopkins, managing partner of wealth solutions at Carson Group. “Maybe they don’t have to be as aggressive but the Fed is going to keep raising rates that’s going to put pressure on mortgage rates to stay up- perhaps between that six to eight and half percent range.”
A recent report from Redfin shows purchasing demand down sharply year-over-year. However, signs of early-stage homebuying demand soared after mortgage rates began to steadily decline in November. Early-stage homebuying demand is a measure of “home-tour requests and other services,” according to Redfin.
Have Mortgage Rates Peaked?
Mortgage rates have doubled since the start of 2022. When inflation came in cooler than expected in October, though, rates fell significantly. This raises the question: Have mortgage rates peaked?
Consistent data showing inflation coming down towards the Fed’s goal is what’s going to push mortgage rates down. One month of cooler inflation is great, but it’s the cumulative effect of rate hikes the Fed truly cares about.
For the time being, likely through all of 2023, we will need to see inflation cooling with every passing month. If that happens, mortgage rates are expected to stabilize and even trend down.
Ideally, housing prices and mortgage interest rates will move towards an equilibrium and the affordability crisis will ease. It will continue to depend, however, on incoming economic data.
Will Mortgage Rates Surge Again?
Average mortgage rates move around a week-to-week basis. So rates could see some upward movement in 2023. If the slower pace of rate hikes from the Fed ends up fanning the flames of inflation, it’s likely mortgage rates will trend upward.
“Even though inflation has maybe peaked, we don’t know that yet. Rates haven’t even hit the epic levels of the early 2000s. Could we get rates back around 9%? For a period of time, I think it’s very possible,” Hopkins says.
Will Home Prices Fall in 2023?
Depending on where you live, prices may already be falling and falling fast. Some of the regional housing markets that saw the most dramatic price growth during the pandemic housing boom are now the places where prices are dropping the fastest.
According to a recent report from Redfin, the median sales price is projected to “drop by roughly 4% – the first annual drop since 2012 – to $368,000 in 2023.”
Sun Belt and Rocky Mountain cities like Boise, Idaho, are some of the regions leading the nation in fastest home price decreases in October.
“In markets that were relatively more expensive, ones that saw rapid price increases during the pandemic, you’re seeing a huge slowdown in market activity. Potential homebuyers have been sidelined by affordability issues,” says Orphe Divounguy, senior economist at Zillow.
Metro areas in the Midwest and Northeast, however, are expected to see home prices remain stable if not climb even higher. Many cities didn’t see prices surge as dramatically during the pandemic, giving them some extra wiggle room to climb going forward.
Experts predict home prices to move further away from their May 2022 peak, helping to curb housing expenses. However, even if improved affordability helps reestablish demand in the housing market, experts say there is still a fundamental supply shortage.
“Supply is so low that even if your purchasing power is up, you can’t buy what’s not for sale,” Kushi says.
Part of what’s keeping upward pressure on home prices is the lack of supply. Even as demand has cratered, there’s still record-low levels of inventory in many markets. That’s not expected to change. Experts predict that new listings will continue to decline in 2023.
“Year-over-year, I do expect a slowdown in sales. We don’t expect interest rates to come down to the levels they were at the same time last year. Sales and inventory will slow down before we’ll see a big drop in values,” Hopkins says.
What the Housing Market Will Look Like For You
The real estate market looks different for everyone. The home buying process is personal to your individual situation and needs.
“There’s no one root solution. Each individual needs to establish a relationship with a lender and realtor to help them navigate that process. But, I wouldn’t let the Fed’s actions or fears about a potential recession discourage me or any other consumers from looking to purchase a home in 2023. Not at all,” Nutall says.
Here’s how to approach 2023 if you fit into some common scenarios:
We haven’t seen a buyers’ market in more than two years. While 2023 isn’t predicted to bring one, a more balanced housing market is good news for first-time buyers.
“We believe we’ll see more opportunities for those individuals who have been priced out of the market. Just because they’re first-time homebuyers, just because of what’s happened in the market does not mean they can’t purchase. It just means they need to put on their thinking caps and work with a reputable lender to accomplish what they want to accomplish,” Nutall says.
If starter-home inventory is sparse in your area, consider townhomes and condos. Many millennials are turning to townhomes and condos because of the affordability and flexibility they offer.
A more balanced housing market also means a return of the negotiating power that was lost during the pandemic housing boom. If a seller isn’t willing to budge on the asking price, see if they’ll accept a mortgage buy-down using points.
“I’m seeing buyers ask for anywhere between two to three points for seller concessions so they can buy down the rate. About 90% of all contracts are asking for that and that’s what sellers should expect going forward,” says Monique Walker, an Arizona-based realtor with RE/MAX Excalibur.
‘Credit Invisible Buyers’
With mortgage rates being what they are, it’s become increasingly difficult for potential buyers to qualify for a competitive, let alone any, rate.
This is especially true for bad-credit and “credit-invisible” buyers, who account for nearly 25 million U.S. adults, according to the Consumer Financial Protection Bureau. Your credit score, essentially a history of your debt repayment, is one of the major factors lenders consider when offering mortgages.
According to the National Credit Union Administration (NCUA), a credit-invisible consumer is defined as having such a limited credit history that they don’t have a credit score. It doesn’t mean you don’t regularly pay back your debts, rather you use other payment types not reported to credit bureaus.
Fortunately, many banks and lenders have instituted credit-invisible homebuying programs that look at alternative credit sources to help consumers access mortgages and other forms of credit.
“We can build a credit profile off of limited data and help the person purchase a home,” Nutall says. “Credit-invisible individuals can make their presence felt in this particular market. It just takes some planning and a unique solution.”
If you find yourself in this situation, talk to lenders about options beyond just using your credit score.
Many existing homeowners, especially those who purchased prior to the pandemic, are reluctant to re-enter the housing market. The thought of giving up mortgages with interest rates in the 3% range is difficult to swallow.
“It’s the golden handcuffs of low mortgage rates,” Kushi told us back in September. “People are rate-locked into their homes and don’t have the financial incentive to sell their home when rates are higher.”
“Refinance activity, for the most part, is going to be contained to whomever borrowed in the last three to four months. If a recession hits or inflation gets back to 2% or below, you’ll see the Fed cut rates and refinance activity return,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm.
A recent survey by Citizens Bank found 68% of homeowners have no plans on selling their home in the next five years.
However, experts note the resiliency of the housing market. It may be experiencing a slowdown in the short term but “There’s still a demographic tailwind that supports purchase demand in the long term,” Kushi says.
How Buyers Should Approach the Housing Market in 2023
While experts are optimistic about the direction of the housing market in 2023, mortgage rates and home prices are not going to drop dramatically overnight.
For potential homebuyers, focus on what you can control in your own financial situation.
Signs you might be in the right position to buy include, but aren’t limited to, having flexibility in your budget, an adequate emergency fund, and sustained income security.
Work with a Reputable Lender
Especially in a rising rate environment, take the time to shop around for different lenders to see who can offer you the best rate. When choosing a lender, you want someone who understands your financial picture as well as your goals.
“Lenders help establish where the buyer is at this point in their life and where they need to be in order to not only purchase the property they want, but to stay in it,” Nutall says.
Remember, the average rate may be far different from the one you qualify for. Building your credit score can help you get a better rate – maybe better than the average. Doing things like paying down high interest debt can help.
For credit-invisible individuals, take some time to compile alternative credit sources – whether that’s a utility or phone bill your name is on – to help lenders establish your credit profile.
Save for a Down Payment Instead
With mortgage rates being what they are and home prices yet to come down significantly, it might not be the right time for you to buy a house – and that’s OK. A silver lining of this inflationary environment is that it’s a great time to save.
The Fed’s rate hikes make things like credit card debt and home equity lines of credit (HELOCs) more expensive. But on the flip side, higher interest rates mean you can get a better return with your savings account or certificate of deposit (CD).
Some of the best high-yield savings accounts offer interest rates massively higher than traditional savings accounts. As the housing market rebalances, it’s a great time to save for your future downpayment and closing costs by taking advantage of compounding interest.
Making a budget and sticking to it is one of the most timeless pieces of financial advice you’ll hear, but it’s particularly important for potential homebuyers.
“My advice is always to budget. Sitting down with my husband on a monthly basis, creating budgets, and making sure we’re sticking to them has always been a really important part of my life,” Kushi says. “And I think it’s more important than ever in a changing environment.”
With a budget, you can get a good idea of how comfortable you are with all the expenses that come with buying a home. Experts recommend you pay close attention to how you can factor in a monthly mortgage payment into your budget. Don’t forget those closing costs, either.
“If you continue to remain on the sidelines, you run the risk of missing a valuable opportunity to purchase a home that could be a part of a generational wealth building strategy. But more than that, it’s a place to live, call your own, and create memories in,” Nutall says. “But it can only happen if that person gets off the sideline.”