)-compressed.jpg "Predicting 2023 Housing Market Trends: What the Experts Say")
Predicting 2023 Housing Market Trends: What the Experts Say
Mortgage Rates Expected to Rise Slowly
Mortgage rates increased dramatically in 2022, jumping from around 3% to over 7% by the end of the year. Rising rates reduce buying power and decrease housing affordability. But rates are not projected to climb nearly as quickly in 2023. Lawrence Yun, chief economist for the National Association of Realtors (NAR), predicts 30-year fixed rates could reach 7.5% by the end of 2023, only a half percentage point higher than now. Other experts see rates going slightly higher, possibly approaching 8%. However, there is broad consensus that the rapid rate surge of 2022 will not be repeated in 2023. Gradual rate increases through 2023 imply a continued cooling in demand rather than a precipitous drop.
Housing Supply Improving Slowly
Tight housing inventory was a major driver of price spikes during the pandemic. Inventory rose slightly in 2022 but remains low historically. Improving supply levels helps take pressure off prices. So far, new construction has not kept pace with demand. But housing starts should continue trending higher, predicts Danielle Hale, chief economist at Realtor.com. Existing homeowners listing houses for sale also provide inventory growth. Hale expects supply conditions to improve in 2023 but not reach pre-pandemic normal levels. Slow inventory growth will prevent overcorrection but keep price gains in check.
Millennial Homebuyers Still Strong
Millennials remain the largest demographic cohort and have fueled much of the robust housing demand over the past decade. Many experts point to millennial homebuying preferences continuing to shape the market in 2023. Mark Fleming, chief economist at First American Financial Corporation, notes the peak age for first home purchases is 33. With the oldest millennials now entering their early 40s, the generation still has several years left to drive demand. Fleming expects millennials to remain a primary source of first-time buyers even as some Gen Zers enter the market.
Suburban Shift Still Ongoing
The pandemic spurred increased remote work and a shift toward more spacious suburban living. This trend from densely packed urban areas to suburbs and secondary cities is likely to persist through 2023 according to Lawrence Yun. While some downtown rental markets are rebounding as workers return to offices, safety concerns and flexibility to work remotely a few days per week mean suburban single-family homes should see solid demand from buyers. The suburban shift helps explain stronger price resilience for single-family homes versus urban condos.
Affordability Challenges Remain
Housing affordability was worsening before the pandemic and became even more strained due to sizable price gains and rising mortgage rates. Though rate increases should moderate in 2023, experts say affordability issues will continue impacting the market. Income growth is not keeping up with home price appreciation. Danielle Hale notes this pressures buyer budgets, especially for first-timers. To maintain affordability, prices cannot sustain large jumps in 2023. Slower home price appreciation is required for the market to rebalance.
Buyer Urgency Fading
Frenzied buyer competition with multiple offers over the asking price characterized the 2020 and 2021 housing markets. Mark Fleming observes this dynamic has changed, with buyer psychology becoming more cautious and selective. Having watched their purchasing power decrease due to higher rates and prices, today’s buyers are more risk-averse. With less fear of missing out and more homes to choose from, purchasers can take time to find the right property at the right price. This shift helps normalize market conditions.
Remote Work Impacts Still Unfolding
The flexibility to work from home surged during the pandemic. However, the longer-term impacts on location preferences remain uncertain. Employers are still optimizing hybrid remote/office schedules. Workers also have varying attitudes about home and office needs. Lawrence Yun believes some increased suburban demand will persist. However, a wholesale abandonment of cities is unlikely given the ongoing centralization of jobs and amenities. The distribution of housing demand across locations may shift modestly due to remote work. But the magnitude is still unclear.
Economic Recession Risk Looms
Housing activity slows significantly during economic downturns as unemployment dampens demand. With high inflation, the Fed aggressively hiked interest rates in 2022. This macroeconomic tightening raises the recession probability in 2023. Most experts stop short of predicting a definite downturn. But uncertainty exists and potential impacts on housing are substantial if a recession unfolds. Danielle Hale notes recessions typically bring declining prices and increased distressed sales. While not a base case, recession probability introduces major forecasting uncertainty.
Key 2023 Projections
The housing market faces crosscurrents entering 2023, making predictions imprecise. But based on key indicators, experts foresee:
- Ongoing but slowing home price appreciation, potentially 3-5%
- Gradual mortgage rate increases to around 7.5-8%
- Minimal improvement in tight inventory levels
- Continued substantial demand from millennials
- Persistent affordability challenges
- Further moderation of buyer competition and price growth rates
- Ongoing suburban shift but no city exodus
- High economic recession risk, potentially impacting demand
The frantic housing market of 2020-2021 is behind us. But a disastrous crash also seems unlikely in 2023. Expect a soft landing with slower price gains – provided broader economic conditions hold up.
