A correction is coming, but the market can handle it
Bright MLS predicts some ups and downs for 2023, including drops in prices and mortgage rates, and a return to seasonal patterns in the spring.
- While demand is expected to rebound, low inventory will keep sales down.
- Bright forecasts mostly flat prices in 2023, with some local markets seeing steep drops and others holding strong.
- With inventory tight, Bright's economist does not expect a repeat of the painful 2008 correction.
One of the largest MLS organizations expects real estate to undergo a market correction in 2023, but it won't be a repeat of 2008.
Bright MLS released its forecast for 2023, predicting that demand for homes will rebound but low inventory levels will push U.S. home sales to a nine-year low. Prices are expected to remain mostly flat nationally, rising just 0.3%.
Lisa Sturtevant, Bright MLS chief economist, said the industry is in a better position to withstand a correction compared to 2008. During the Great Recession, prices fell by 30% or more due to a perfect storm of loose credit standards, a surge in subprime lending, an oversupply of homes and rising unemployment.
"The situation today is much different — lending standards are much stricter than they were 15 years ago, supply remains limited, and employment is strong," said Sturtevant. "Millennials, many of whom are at peak first-time homebuying ages, will fuel strong demand throughout 2023. The challenge is that there will be too few homes available to meet that demand and high home prices will still make affordability a challenge, particularly for first-time buyers."
Low inventory will limit sales
Although more predictable mortgage rates and favorable demographics will support greater housing demand in 2023, Sturtevant said low inventory will keep home sales down as many homeowners hold onto the sub-3% mortgage rates they locked in earlier this year. She also noted that some homebuyers pushed up the timing of their home purchase to take advantage of those low rates, removing them from the market in 2023.
"Inventory should tick up a bit as we head into spring, but supply will remain very tight," Sturtevant said in an email. "There will always be people who need to move, and some of these folks have been waiting here at the end of the year and will list their home after the first of the year. But new construction has slowed considerably and builders have already been offering aggressive concessions to get quick move-ins, so I don't think we'll see a big bump on the new construction side early in 2023."
Prices will remain flat overall, with big drops in some areas
Though Bright predicts flat home prices nationally in 2023, they anticipate prices will be highly variable across local housing markets.
The markets that could see steep drops in prices are ones where home prices grew the fastest during the pandemic, inventory rose quickly, sellers are dropping their list prices, affordability is a greater challenge and the labor market is weaker. Metros that match those criteria and are at risk of significant price declines in 2023 include Las Vegas, Phoenix, Austin, Los Angeles and Riverside-San Bernardino, California.
Bright's list of markets that are expected to be the strongest in 2023 are mostly in the Midwest: Minneapolis, St. Louis, Louisville, Indianapolis and Virginia Beach.
Mortgage rates will decline slowly, seasonality will return
After ending 2022 at around 6.5%, Bright predicts that mortgage rates will fall in 2023, but not as quickly as they rose. Rates may drop to 6% by the end of 2023 — still much higher than they have been in recent years, but more in line with pre-Great Recession levels. "Even though mortgage rates will remain above 6%, more prospective buyers will start accepting the 'new normal' rates," Sturtevant said.
After a couple years of intense year-round buying and selling, Sturtevant expects seasonality to return to the market. Sales activity will pick up in the spring after a slow winter, but it won't be anywhere close to the level seen in spring 2022.
What else will Sturtevant be watching for in 2023? She plans to keep a close eye on inventory, specifically new listings, to see if sellers are returning to the market or if they're opting to hold onto their homes — and their low-interest loans.
Bright's forecast is based on economic data from the U.S. Bureau of Labor Statistics and the U.S. Census Bureau, as well as metro area housing market data compiled by Realtor.com.
Bright MLS is the second-largest MLS in the U.S. based on 2021 membership, according to the T3 Sixty 2022 Real Estate Almanac. It serves several East Coast markets, including Maryland, New Jersey, Pennsylvania and Virginia.