We are just around the corner in 2022 and we are quickly heading into a new year. That makes this a perfect time to forecast real estate matters for 2023. With mortgage rates rising, home sales and, in some areas, house prices — hitting the brakes and feeling heightened uncertainty throughout the market, many homeowners, prospective sellers and prospective buyers are nervous about the year ahead.
And for good reason. Consider that, at the time of this writing, the average 30-year fixed mortgage rate is 7.04 percent. The rate of inflation is alarming 8.2 percent. And second-hand home sales fell 1.5 percent in September from August at a seasonally adjusted annual rate of 4.71 million units, according to the National Association of Realtors, meaning existing homes are selling at the slowest pace seen in 10 years.
We reached out to a number of industry experts, each of whom offered interesting forecasts and projections on where mortgage rates are headed, home prices, buyer competition, housing supply, Home Sales and Affordability in 2023. Curious to see what the pros think? Read on for their evaluations and predictions.
Will mortgage rates continue to rise?
With interest rates nearly doubling from their lows in early 2022, it’s reasonable to assume the cost of financing a home won’t go down this year. But how about throughout 2023? Is there any light at the end of this dark tunnel?
Some say no. “Continuing inflation, higher interest rates overall, a potential recession and geopolitical tensions will push 30-year and 15-year mortgage rates higher throughout 2023 and bring the two rates closer together as near-term risks rise. term,” warns Dennis Shirshikov, a strategist at Awning.com and a professor of economics and finance at the City University of New York, who sees benchmark 30-year and 15-year home loans averaging 8.75% and 8 .25%, respectively, until 2023.
Robert Johnson, a finance professor at Creighton University’s Heider School of Business, shares some of those sentiments.
“By the end of 2023, financial market participants expect the Fed to have raised the target federal funds rate by 175 to 200 basis points from current levels. That would translate to 30-year and 15-year mortgage rates of about 8.50 and 7.70 percent,” he says.
Rick Sharga, Executive Vice President of Market Intelligence at ATTOM Data Solutions, who discusses real estate and proprietary data, is more hopeful. He posits that rates peak at around 8 percent and 7.25 percent for 30- and 15-year loans in early 2023, “then gradually drop over the course of the year to stay in the 6 percent range.” .0 percent and 5.25 percent, respectively. This depends entirely on the Fed’s ability to rein in inflation and smooth out its aggressive rate hikes.”
Three different paths for interest rates
Meanwhile, Nadia Evangelou, a senior economist and director of Real Estate Research at the National Association of Realtors, envisions three different rate scenarios for the coming year.
“In scenario #1, inflation remains high, forcing the Fed to raise interest rates repeatedly. That means mortgage rates will continue to rise, possibly closer to 8.5 percent. In scenario #2, the consumer price index responds more to Fed rate hikes and there is a gradual slowdown in inflation, causing mortgage rates to stabilize near 7% to 7.5 % by 2023. In scenario #3, the Fed raises rates repeatedly to curb inflation and the economy falls into recession. This could cause rates to drop to 5 percent,” he explains.
Will home sales drop?
Each of Evangelou’s three scenarios for mortgage rates would have a big impact on home sales. In each case, sales will decline; it’s just a matter of how much.
“Higher rates in scenario #1 could cause home sales to fall more than 10 percent next year,” it continues. “In scenario #2, home sales fall 7 to 8 percent. And in the third scenario, activity at home can also drop more than 15 percent.”
Our other experts agree: The slowdown in home sales What has been going on all year will continue into 2023. Sharga believes existing home sales in 2023 will slow, likely hovering around 4.5 million, with new home sales hovering around 600,000.
Listings may no longer be going at a breakneck pace either. “Days on the market have returned to more normal levels recently, and we could see them approaching 30 days or more in 2023 as the market continues to cool,” he says.
Shirshikov sympathizes with those sentiments. “Average days on the market will increase to two to three times current levels,” he notes.
What will happen to the value of houses?
Interestingly, due to low inventory, “home prices won’t go down in 2023,” Evangelou predicts. “I expect prices to be relatively flat, rising just 1 percentage point.”
However, Johnson believes that higher interest rates will undoubtedly damage home values and prices. “You will see a weak real estate market with prices at lower levels than current levels,” says Johnson.
that’s not cool news for sellersbut good news for home seekers.
“There are many potential buyers who are still patiently waiting to enter the market. Assuming home prices go down, you’ll start to see some of these buyers emerge, especially cash or buyers with a lower loan-to-value ratio who are less affected by any interest rate concerns,” explains Scott Krinsky, a partner in the Residential Banking Department at Romer Debbas, a Manhattan real estate law firm.
National home values are almost certain to decline at least modestly, perhaps by 5 to 10 percent, according to Sharga.
“Some of the more expensive markets will potentially see bigger drops. Limited inventory, strong credit quality among current mortgage holders, and demand from young adults looking to become homeowners should help keep prices from falling further,” Sharga continues.
Will 2023 be a buyer’s market or a seller’s market?
For two years, he has been a vendor’s market. Will 2023 favor buyers or sellers more in most markets? Greg McBride, chief financial analyst at Bankrate, says that “affordability issues and economic concerns will depress demand from homebuyers, and the inventory of homes available for sale will remain limited. So it will continue to be more of a balanced market than tilted to one side or the other.”
Krinsky expects leverage to vary nationally, depending on the type of market.
“With the pandemic, we saw a new spike in bidding wars in suburban and smaller markets, likely due to the desire for more space and the greater flexibility of remote work across the country,” Krinsky says. “Now that many offices and businesses are back to near full capacity and fully operational, the hope is that the larger markets can return to pre-pandemic levels and we will see increased demand there.”
Johnson, on the other hand, anticipates vendors holding fewer cards. “It’s going to be a buyer’s market next year, as a lot of reluctant sellers (those waiting for the market to turn) will probably capitulate, increasing the supply of homes,” he says.
Will the housing inventory increase?
The housing shortage has helped fuel the frantic market in recent years. But experts differ on housing stock projections for 2023.
“Prior to the 2008 housing crisis, inventory peaked at about 13 months’ supply, double what we’d see in a healthy market,” says Sharga. “Today we have a three-month supply, which is about half of what we need. Current homeowners are unlikely to trade their 3 percent mortgage for a new home with a 7 percent loan unless absolutely necessary, so existing home inventory should remain low. And builders have cut home starts for the past three months. That means we’re also not likely to see a big increase in newbuild supply anytime soon.”
But others foresee an increase in supply next year. “Housing inventory will increase throughout 2023 as homes become more unaffordable due to high rates,” Shirshikov thinks.
Will the houses be more affordable?
Will homes still be out of financial reach for many buyers next year, or will things get better for buyers?
“Yes inflation pressures ease and we see a significant pullback in mortgage rates next year, this will ease some of the pressure on buyers, but only a little bit,” explains McBride. “Prices are going to be pretty stable, and in many markets that’s a price that’s 40 percent or more higher than it was before the pandemic.”
“Housing prices will not fall proportionally,” Shirshikov thinks. Any “drop in prices will not be enough to compensate for the increase in the interest rate and its contribution to the monthly rate [mortgage] payment.” As a result, houses may even seem less affordable, he says.
The impact of higher mortgage rates and lower home prices in 2023 will likely largely cancel each other out, Johnson agrees. His take: “Overall housing affordability won’t change drastically.”
The final result of the real estate market of 2023
Taking an overview of the possible real estate market next year, most professionals agree: something of a transition year, characterized by uncertainty.
“The real estate market will be tepid in 2023, with only lukewarm demand and a limited amount of inventory available for sale,” McBride predicts. However, “mortgage rates could fall significantly next year if inflation pressures ease.”
“The hope is that as supply and demand within the housing market normalizes, interest rates can begin to come back down to earth,” agrees Krinsky. “Until this happens, those who simply cannot pay the costs of borrowed money will have to continue to wait. For those waiting on the sidelines in the hope that rates will drop soon, they may have to come to terms with the fact that the lower rate funding windows open in 2020 and 2021 have closed.”
But if mortgage rates don’t move much, “that means borrowers will take out fewer purchase loans and we’ll see a continued decline in rate-based refinancing activity,” Sharga reiterates. “With more homeowners staying in place, we could also see an increase in home equity loans and home equity lines of credit over the course of the year.” In other words, if the move will be outside, remodeling may well be inside.