2023 Real Estate Forecast: Market to Regain Normalcy

Businessman and 2023 blocks near house.

Even though mortgage rates and home prices are expected to moderate, home sales may still sag under persistent inventory shortages.

While 2022 may be remembered as a year of housing volatility, 2023 likely will become a year of long-lost normalcy returning to the market. Mortgage rates are expected to stabilize while home sales and prices moderate after recent highs. However, the details could be different from region to region.

Some housing markets may see an uptick in homebuying activity at the beginning of the year, especially if mortgage rates continue receding from a recent high of 7%. Housing inventory is expected to remain tight in 2023, with housing starts below historical averages and fewer homeowners willing to sell. The ongoing housing supply challenges will prevent home prices from falling, though price appreciation will slow and may see many hopeful signs for early next year.

The market has closed out 2022, a year when inflation soared to a 40-year high and rapidly rising mortgage rates put the brakes on what had been a pandemic-era homebuying frenzy. Existing-home sales are expected to end the year 16% down from the same time period in 2021, marking their lowest level since 2014. Annual new-home sales likely will be down 17% for 2022, returning to pre-pandemic levels.

Predictions on home sales to fall by 6.8% in 2023 compared to 2022, with the brunt of the slowdown to occur in the first quarter of the new year. Some of the softening can be attributed to homeowners who are unwilling to trade in a higher mortgage rate, as well as economic uncertainty. Meanwhile, home prices in 2023 are forecast to reach $385,800, an increase of 0.3% compared to 2022.

After a big boom over the past two years, there will essentially be no change nationally in home prices in 2023. Half of the country may experience small price gains, while the other half may see slight price declines. Markets in California, like San Francisco, that may be the exception. The Bay Area could register double-digit price drops of 10% to 15%.

Mortgage rates are the lifeblood that drive home sales, for the last four weeks, rates have been dropping after reaching 7.08% in November. On Tuesday, the Consumer Price Index offered hope that inflation is further cooling, prompting the Federal Reserve to start slowing the hikes to its benchmark interest rate.

Mortgage rates may have already peaked. As this is an “abnormally high spread” between 30-year fixed-rate mortgages and the Treasury, which historically are more closely tied together. As the mortgage market normalizes, it will be an opportunity for rates to decline even further, adding that he expects mortgage rates to settle at 5.7% by the end of next year.

Still, mortgage rates are more than double what they were a year ago, ramping up rapidly this fall and walloping housing affordability. But if inflation continues to slow and rates stabilize, that could bring more buyers back to the market and boost demand for housing.

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