2023 could be a year of paradoxes, with slow sales but rising prices
Realtor.com economists predict an unusual year ahead, with higher interest rates and more inventory, but not the drop in prices that would typically follow.
- Mortgage interest rates could average 7.4% as the Fed continues to try and tame inflation.
- Higher rates, in turn, will lead to slower home sales and a buildup of inventory, but other factors will keep prices edging up.
- The spring season could set the tone for the remainder of the year.
The coming year is shaping up to be a strange one for real estate, according to the 2023 forecast released today by Realtor.com.
The company's economists are predicting interest rates will remain elevated and home sales will remain slow — yet home prices and rents will increase next year even as inventory rises.
In the face of slower sales and greater supply, how is it that home prices will rise nationally, albeit slightly, in 2023? The answer, according to Realtor.com Senior Economist George Ratiu, can be found by looking at other factors that influence the housing market.
"The combination of demographic tailwinds and over a decade's worth of underbuilding is keeping a floor under pricing dynamics," Ratiu said in an email. "List prices have come down from their June 2022 peaks and are expected to continue softening. However, with incomes still rising and unemployment low, Americans will continue seeking to buy homes next year."
Realtor.com Chief Economist Danielle Hale agreed, adding that the slower pace of the housing market means drastic shifts in price declines may not happen as quickly as buyers anticipate, if they happen at all.
"Americans who are determined to make a move will find that staying up-to-date on the market, flexibility, creativity and a healthy dose of patience will go a long way toward success in the year ahead," Hale said.
Here's what Realtor.com's economists expect to see in 2023:
Mortgage rates will average 7.4%, with early 2023 hikes followed by a slight retreat to 7.1% by year-end.
Home sales prices won't come down, but growth will moderate to a single-digit yearly pace (5.4%) for the first time since 2020.
Rent growth will outpace home prices at 6.3% year-over-year and will likely hit new highs, further adding to budget pressures — especially for first-time buyers.
Inventory will increase (+22.8% year-over-year) as the changing market dynamics that began last summer accelerate.
Home sales will decline 14.1% year-over-year to 4.53 million, the lowest level since 2012.
Ratiu expects inflation to run at about half the rate that it was in 2022, but that will still keep interest rates elevated. He said the pace of the real estate slowdown will not be steep enough to knock inflation down further, particularly with continued labor shortages putting pressure on wages.
With interest rates in the 7% range in 2023, many potential buyers will continue opting to rent. While there was plenty of rental housing construction in 2022, it still wasn't enough to make up for the shortage in recent years, Ratiu said.
"These factors contributed to a sharp rise in rents this year, which — while moderating in 2023 — is expected to keep landlords in a stronger position," Ratiu said.
Both buyers and sellers should get a good sense of where the market is going in the spring. If interest rates flatten out in early 2023, combined with rising incomes, that could create a more predictable market for buyers and sellers.
"On the other hand, a weak start to the spring season will signal continued weakness through the rest of the year," Ratiu said.
While spring usually sets the tone for the homebuying season, there is also a chance that buyers and sellers will still be trying to figure out the market. If mortgage rates dip by June, pent-up demand and a lot more inventory could lead to a rally in the second half of the year, according to the report.
Of course, any potential rally could be offset by affordability concerns. Realtor.com expects the typical monthly mortgage payment to be $2,430 — 28% higher than in 2022. Given that rents are also expected to rise, first-time buyers will not only need a larger down payment but will also be less able to save due to high rents.
"Of the many factors that are expected to affect the housing market in 2023, affordability tops the list of issues most likely to make or break buyers' plans," Hale said.