Will Home Prices and Mortgage Rates Fall? What To Expect in 2023

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It’s safe to say we’ve never encountered a housing market nearly as unpredictable as the one we’re in right now. After months of navigating wild fluctuations, homebuyers, sellers, owners, and renters are now desperately trying to read the tea leaves to figure out where real estate prices, inventories, sales, and mortgage rates are going in the coming year.

And just in time, Realtor.com® is here to help them all figure it out with our annual housing forecast.

The bottom line: Homebuyers and renters hoping for some financial relief in 2023 will likely be disappointed. But they won’t get whiplash either. The dramatic swings and wild gyrations in the housing market are expected to taper off as the real estate ecosystem continues to slow.

While the Realtor.com 2023 forecast anticipates home and rental prices will keep climbing next year, the increases will be much more modest than the huge surges seen earlier this year. Mortgage interest rates, which have become the bane of many first-time and other buyers who can’t pay all in cash, will remain high. But they aren’t expected to substantially rise again.

Sales are expected to continue falling as buyers simply can’t afford the onerous combination of towering home prices and high mortgage rates. Home and rental prices have been falling from their peaks over the summer, but they’re still rising year over year.

“It’s going to be a tough year for homebuyers, home sellers, and the overall housing market,” says Realtor.com Chief Economist Danielle Hale. But “we’re going to take some steps toward a better balance between buyers and sellers.”

One bright spot for buyers will be the number of homes for sale, which has been hovering near crisis level and is finally expected to rise. But will that be enough to bring buyers back into the market?

This is what homebuyers, home sellers, and renters can expect in the new year.

Home prices won’t drop, defying expectations

Simply put, higher mortgages have utterly bludgeoned the housing market.

Buyers, particularly first-timers, can’t afford to offer as much for a home when their monthly payments are inflated by higher interest rates. But home prices next year aren’t expected to crash.

Nationally, Realtor.com predicts they’ll rise 5.4% year over year in 2023. That’s still going to hurt—but not as much as the double-digit increases seen during the COVID-19 pandemic.

Median monthly mortgage payments are expected to be about 28% larger than this year and twice as large as they were in 2021. To put into perspective how tapped-out homebuyers are, monthly mortgage payments were about three-quarters larger in late October than they were in 2021. (The latter figure depended on that week’s average mortgage rates.)

“Most other forecasts call for price declines,” says Hale. “But that’s not what we’re expecting.”

Sellers don’t want to lower their asking prices too much after watching their neighbors make bank just a few months ago. And there are still too many people who want homes than there are available residences to go around.

“What buyers can afford to pay with mortgage rates as high as they are may not match what sellers are looking for,” says Hale.

Home price growth will continue to slow and could even dip a little over the next few years. Realtor.com anticipates the correction in the market could last through 2025.

Renters, many of whom are already suffering from sticker shock, won’t fare any better. Nationally, rents are expected to rise by 6.3% year over year in 2023.  While painful, it’s also far below the double-digit jumps experienced earlier this year.

“Landlords are aware that demand is not as unlimited as it was at the beginning of the year,” says Hale.

The exceptions are the big, expensive cities where rents seemingly fell off a cliff during the pandemic as renters fled to quieter, less-populated communities. Landlords slashed their asking prices, then jacked them back up and then some when tenants returned seeking rentals. There might be more room for rents to grow in 2023 in the urban areas than in the suburbs.

Mortgage rates will stay frustratingly high

Soaring mortgage rates have ground the housing market to a halt, forcing many would-be buyers to stay put or rent for longer than they had anticipated. Many plan to jump back into the homebuying fray once rates come down. But they may have to wait for longer than they had hoped.

Realtor.com predicts that mortgage rates will average 7.4% in 2023, trickling down to 7.1% by year’s end.

Rates are expected to remain high thanks to the Federal Reserve. As it hiked up its own interest rates to slow inflation, mortgage rates have followed a similar, upward trajectory. And the Fed seems committed to continuing to raise rates.

While the Fed’s actions are only one component that goes into mortgage rates, it’s emerged as a significant one this year. That’s expected to keep rates around 7%, where they were a few weeks ago, before falling to the mid-6% range after inflation showed signs of cooling.

“Even though we have seen some progress on inflation, it’s three-and-a-half to four times higher than the Fed would like it to be,” says Hale. “That means there’s more work for the Fed to do.”

The number of homes for sale will surge…

The silver lining for buyers, long frustrated by the anemic number of choices out there for them, is that more homes will be available for sale. The inventory of properties is expected to spike by 22.8%. (This includes only existing homes, which are previously lived-in residences, and excludes new construction.)

However, the surge won’t be due to more sellers putting their homes up for sale. Homes are expected to sit on the market for longer, as there will be fewer buyers who can afford to purchase property with mortgage rates so high. Those homes will accrue, which is why inventory will rise.

“It’s definitely needed,” says Hale of that increase in real estate on the market. “Buyers are more cautious in an environment where costs are higher for them.”

While those extra homes are sorely needed, they’re still far below what they are in a more normal housing market. The number of existing homes forecasted to be for sale in 2023 will still be 15% less than in 2019—when there was already a national housing shortage.

Despite the scarcity, builders aren’t expected to put up as many homes in 2023. Their pool of customers is drying up because buyers can’t afford the homes at higher mortgage rates. New construction is anticipated to fall about 5.4% year over year.

“They can’t build them at prices that buyers can afford,” says Hale. Land, materials, and labor costs are simply too high. “They’re pulling back on permitting and the housing units they are starting.”

… while the number of home sales will fall

The number of home sales is expected to keep dropping as buyers keep getting priced out of the market. Sales are anticipated to fall 13.8% year over year in 2022 and then keep decreasing by 14.1% in 2023. There will be just 4.53 million sales next year, the fewest transactions since the depths of the Great Recession in 2012.

(These predictions include only existing homes and exclude new construction.)

Realtor.com expects the usually busy spring season will be quieter than normal in 2023 as buyers struggle against the higher prices and mortgage rates. Renters are already stretched thin contending with higher and rising rents along with inflation, making it difficult to save up for a down payment on a home of their own.

Many homeowners will simply stay put and weather the storm in the housing market. Plenty are locked into mortgages with very low rates. That will make them think twice before selling their property and purchasing a new one with a mortgage rate that will be significantly higher. Even if they’re downsizing into a much smaller home, it could cost them significantly more to do so.

The homeownership rate in America is expected to basically hold steady, ticking down to 65.7% in 2023 from 65.8% in 2022.

Those who do sell will still do well. The average homeowner will see their equity rise by $25,650 in 2023. Those in more affordable parts of the country could see even higher gains as people from higher-priced markets relocate to cheaper ones, bidding up prices.

A severe recession could upend these predictions

While Realtor.com doesn’t expect the nation will succumb to a major recession, economists aren’t ruling it out entirely. Typically during a downturn, the Fed cuts its interest rates. That could cause mortgage rates, prices, and home sales to fall.

While some buyers are likely to jump into the market as soon as rates go down, others won’t want to make what is often the largest purchase of their lives during a downturn when their jobs might not be stable. And some folks will become unemployed or lose overtime and side gigs, making homeownership unaffordable.

“If prices decline, it might bring buyers back,” says Hale. But “a more severe recession would mean fewer sales.”

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