We’ve rounded the corner on 2022 and quickly heading into a new year. That makes this an ideal time to prognosticate about real estate matters for 2023. Mortgage rates are escalating higher, home sales—and, in some areas, home prices—are hitting the brakes and increased uncertainty is felt throughout the market. Here’s what industry experts had to say about where mortgage rates, home prices, buyer competition, housing supply, sales activity and home affordability are headed in 2023.
Will mortgage rates continue to climb?
Mortgage rates have soared since hitting their lowest rates in early 2022 and while they will likely fall at some point, it’s unlikely that they will come down this year. But what about across 2023? There are differing opinions on this topic. Some believe that continued inflation, overall higher interest rates, a potential recession and geopolitical tensions will force 30-year and 15-year mortgage rates up throughout 2023 and bring the two rates closer together as short-term risks rise.
Three different roads for interest rates
Experts foresee three different scenarios occurring in the next year.
In the first scenario, inflation continues to remain high and the Fed raises interest rates repeatedly, which could cause mortgage rates to climb as high as 8.5 percent. In the second scenario, the Consumer Price Index responds more to Fed rate hikes, leading to a gradual deceleration in inflation and stabilizing mortgage rates at approximately 7 percent to 7.5 percent by 2023. In the third scenario, the Fed raises rates repeatedly to curb inflation and the economy falls into a recession; this could lead to mortgage rates dropping as low as 5 percent.
Will housing sales decline?
All three scenarios for mortgage rates would have a major impact on home sales. In each case, sales will be lower — it’s just a question of how much lower.
Higher rates under scenario #1 could cause home sales to drop by more than 10 percent next year. In scenario #2, home sales drop by 7 percent to 8 percent. And in the third scenario, home activity may also drop further by more than 15 percent.
Experts agree: The slowdown in home sales that’s been occurring all year will continue into 2023. Listings may no longer go at a lightning-fast pace, either. Days on the market have been climbing back toward more normal levels recently, and we could see them approach 30 days or more in 2023 as the market continues to cool down.
What will happen to home values?
Due to low inventory, some analysts say that home prices won’t drop in 2023. Prices are expected to remain flat or even increase slightly, whereas other analysts predict that higher interest rates will most certainly hurt home values and pricing. No one expects housing prices to soar, but Florida is a different animal altogether.
While this isn’t good news for sellers, it’s welcome news for house-hunters. That’s because there are plenty of potential buyers who still patiently wait to enter the market. If home prices ease, you’ll start to see some of these buyers emerge—especially those who can pay cash or purchase a home with a low loan-to-value ratio and are therefore less concerned about an increase in interest rates.
Will 2023 be a buyer’s market or a seller’s market?
Since just after the pandemic started, it’s been a seller’s market. Will 2023 favor buyers or sellers more in most markets? One analysts says it will continue to be more of a balanced market than tilting one way or the other.”
Will housing inventory increase?
A shortage of homes has helped fuel the frenzied market of the last few years, however experts differ on housing inventory projections for 2023.
Most predict the housing inventory will rise throughout 2023 as homes become more unaffordable due to high rates.
The bottom line on the 2023 housing market
Taking a look at the big-picture in the possible real estate market next year, most analysts are in consensus: it will be something of a transitional year, characterized by uncertainty.
They predict that the housing market will be tepid in 2023, with only lukewarm demand and a limited amount of inventory available for sale. However, mortgage rates could pull back meaningfully next year if inflation pressures ease.
The hope is that, as supply and demand within the housing market normalizes, interest rates can start to come back down to earth. Until this happens, those who simply cannot afford the costs of borrowed money will have to continue to wait. For those waiting on the sidelines holding out hope that rates may soon drop, they might have to accept the fact that the lower-rate financing windows open in 2020 and 2021 have closed.
If mortgage rates remain constant, we will see fewer purchase loans and rate-based refinance activity. Since many homeowners are not moving, we may also see an increase in home equity loans and home equity lines of credit over the course of the year. If moving is out of the question, remodeling may well be in.