High mortgage rates have put some much-needed pressure on the housing market in recent months after home prices hit record highs across the nation. But as mortgage rates have shown some decline lately, many economists are mixed about whether home prices will continue to decelerate through 2023—or crash.
The nation’s overall housing supply remains limited, as those who purchased homes in recent years at extremely low mortgage rates are staying put. This tight inventory has kept prices from really dropping off, making homes still unaffordable for many, especially first-time homebuyers.
Even though home prices remain high year-over-year (YOY), they’re not as eye-popping as they were in early 2022. How far home prices dip in 2023 will likely depend on where mortgage rates go.
Housing Market Forecast for January 2023
As we enter 2023, housing experts maintain a watchful eye on the economy, which is still being pulled in all directions by high inflation, steep interest rates, ongoing geopolitical uncertainties and recession fears, to name a few.
After a couple of red-hot years for the housing market, there are indicators a correction is underway—but it’s been slow-going. Mortgage rates are still hovering around double what they were a year ago. And nationwide home prices are still increasing on a monthly basis despite a decline in total sales. This continues to make it harder for many homebuyers to access affordable housing.
The median existing-home sales price was up 3.5% to $370,700 in November compared to a year ago, according to the National Association of Realtors (NAR). It was the 129th consecutive month of YOY price increases—a record streak—even though home prices have fallen from their record high of $413,800 in June.
Still, higher housing costs have taken a toll on home shoppers as mortgage applications are at their lowest level in over 25 years, according to the Mortgage Bankers Association (MBA).
And the total existing-home sales dropped 7.7% from October to November, marking the tenth consecutive month of declining sales, and down 35% from a year ago.
Because of this, some experts say the housing market has reached its bottom already.
“It seems we have already reached the bottom of the low home sales activity,” says Nadia Evangelou, senior economist and director of forecasting for the NAR. “And with mortgage rates stabilizing near 6%, we expect the housing market to turn around in 2023. . .and rebound in 2024.”
Housing Inventory Predictions for January 2023
Low housing inventory has been a challenge since the 2008 housing crash, when the construction of new homes plummeted. And it hasn’t fully recovered.
Housing supply that remains near historic lows has held up demand compared to other downturns, consequently sustaining higher home prices.
“For most of this year, prospective home buyers have faced the dual challenges of elevated mortgage rates and limited housing inventory,” said NAR’s president Kenny Parcell, in a recent report.
At the current sales pace, inventory is at a 3.3-month supply, according to NAR.
“[This] is about half of what we’d like to see normally,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data. “And we still have pent-up demands based on demographic trends.”
However, if builder sentiment is any indication, housing inventory may soon begin to see a boost. Home builder confidence rose four points in January, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This ended 12 straight months of declines in builder confidence, signaling that a rebound in home building could be coming later in 2023.
“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” said NAHB Chief Economist Robert Dietz.
When Will the Housing Market Crash?
There are mixed signals from economists about if and when the housing market will crash, or if it will simply correct itself from the double-digit percentage jumps seen in home prices the past few years.
“We’re estimating about a 5% drop nationally,” says Sharga. “Some markets, believe it or not, will probably see prices continue to increase.”
Other experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, so the likelihood of a housing market crash is low.
“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow.
Bachaud also notes that mortgage products have become less risky.
“There are a lot more regulations and restrictions in the mortgage market that make it a lot stronger, and less volatile and less risky, than it was in the market after 2008,” she says.
In a housing market crash, you would typically see a 20% to 30% drop in home prices and a decline in home sales—far more than what’s currently happening. Another crash symptom that’s been missing is a jump in foreclosure activity.
“I think we’re more likely to see the market cool, rather than crash,” Sharga says.
Are a Lot of Foreclosures Coming?
Following a steady rise in foreclosures that resulted after the expiration of the Covid-19 foreclosure moratorium in September 2021, foreclosures may have hit their peak, according to ATTOM Data Solutions, a leading curator of real estate data. Though foreclosure filings are up 72% from a year ago, they were only up less than a percent between November and December 2022.
“Eighteen months after the end of the government’s foreclosure moratorium, and with less than five percent of the 8.4 million borrowers who entered the CARES Act forbearance program remaining, foreclosure activity remains significantly lower than it was prior to the COVID-19 pandemic,” said Sharga. “It seems clear that government and mortgage industry efforts during the pandemic, coupled with a strong economy, have helped prevent millions of unnecessary foreclosures.”
A key difference now compared to the last housing crisis is that many homeowners, and even those struggling to make payments, have had a large boost to their home values in recent years. That means they still have equity in their homes and are not underwater—when you owe more than the house is worth.
“(E)ven as the foreclosure moratorium was lifted…we didn’t see a huge flood of foreclosures because people have so much equity,” says Bachaud.
When Should I Buy a Home in 2023?
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.
Use a mortgage calculator to estimate your monthly housing costs based on your down payment and interest rate.
Trying to predict what might happen next year is not the best homebuying strategy. “Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed,” says Neda Navab, president of the U.S. region at Compass, a real estate tech company.
Navab expects home prices in the hotter markets during the past few years to decrease somewhat, but she doesn’t expect a widespread, national price decline like what followed the 2008 financial crisis.
Instead of waiting for much lower prices, experts suggest buying a home based on your budget and needs. If you find a home you love in an area you love, and it also fits your budget, then chances are it might be right for you. However, if you make too many sacrifices just to get a house, you may end up with buyer’s remorse, potentially forcing you to offload the house.
Tips for Buying in Today’s Housing Market
Start with a budget and stick with it. Even with a slight uptick in the number of homes for sale, buyers are still facing elevated prices and mortgage rates nearing 7%.
“The biggest thing right now is the disconnect between buyers and sellers,” says Rita.
Tayenaka, owner of Orange County, California-based Coast to Canyon brokerage. “Buyers want to lowball, and sellers want last year’s price.”
While buyers are getting a bit more breathing room now, they should keep in mind that it’s still a seller’s market while they consider their options.
Tips for Selling in Today’s Housing Market
The first step for a successful sale is to find a listing agent who knows the area and comes highly recommended. A good agent will work closely with you to price your home competitively while fielding questions and offers from prospective buyers.
Tayenaka points to the outsize number of homes falling out of escrow recently as a cautionary tale for sellers who continue to demand 2021 prices. “Everyone thinks their house is special,” she says.
Even though the market may still be tipped in your favor, it’s in your best interest to present your home in the best possible light. Not everyone has cash dedicated to renovations and repairs, but a little sweat equity can go a long way. The first step is to declutter, organize and clean. Even if your home is outdated, a clean space gives buyers a chance to envision the house’s potential.