Housing market predictions for 2023: Rates, prices, and inventory

December 19, 2022 - 7 min read

What to expect from the 2023 housing market

Everyone knows 2022 was a rough year for home buyers. Interest rates more than doubled over the course of the year while housing prices only continued to climb.

But the tides are beginning to turn. Buyers have gained more leverage as homes sit on the market longer. And mortgage rates ticked back down in November and December.

Will things keep looking up in 2023? Or could the market overcorrect, leading to a crash? Here’s what buyers and homeowners can expect in the new year.

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Will the housing market get better in 2023?

Broadly, housing pros expect the market to moderate in the new year. Most predict a decline in home sales and at least a temporary drop in prices — although the industry is split on whether mortgage rates will rise or fall in 2023.

According to the National Association of Realtors, home sales are expected to decline by around 7%, while the national median home price will increase by 1%.

But keep in mind that annual projections could account for very different markets in the early and later parts of the year.

Ralph DiBugnara, president of Home Qualified, thinks the first quarter of 2023 could look very similar to the fourth quarter of 2022. “Home prices will be down between 5% and 10%, and mortgage rates will hold in the high 6% range,” he predicts.

But, “In the second half of the year, starting with the spring market, we will start to see interest rates reduced — possibly into the mid 5% range,” DiBugnara adds.

Jason Gelios, a Realtor in Southeast Michigan, agrees that 2023 could be more buyer-friendly.

“In 2023, many buyers will be able to purchase at reasonable prices, with many homeowners getting off the fence about selling. And while mortgage rates will remain high, buyers will have more purchasing power,” says Gelios.

Mike Pappas, CEO of The Keyes Company, adds that “It will be a more normalized market, with likely a 10% decline in sales. We will see the first-time homebuyer market increase, and condominium sales will improve because they are often more affordable than single-family homes.”

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Will home prices go down in 2023?

One of the biggest questions on buyers’ minds is whether home prices will drop in 2023. And if they do, will they drop a little — just enough to be affordable again? Or will they drop a lot, leading to a market crash and an equity crisis for homeowners?

The good news is, experts aren’t predicting a market crash à la 2008. With inventory still low and home equity levels high, the conditions just aren’t there for a major downturn.

But as to whether prices will fall in 2023, experts are split. Some predict a small drop, while others think we could see home prices continue to rise but at a more modest pace than in 2022.

“In 2023, many buyers will be able to purchase at reasonable prices, with many homeowners getting off the fence about selling.”

–Jason Gelios, Realtor

“Housing values are predicted to appreciate steadily, just not at the double-digit gains we observed in the past few years,” says Gelios. “Sellers can still expect to make a decent profit from their sale, provided their sales price is strong coming onto the market.”

Jennifer Spinelli, founder and CEO of Niche Home Buyer, also believes prices will rise moderately. “Factors that will contribute to this include the increasing demand for housing, lower mortgage interest rates, and the potential for an economic recovery,” she explains.

On the other hand, DiBugnara anticipates prices falling by around 5% on average within the first quarter of 2023. But he notes that a significant drop in mortgage rates could spur prices higher again.

“Once interest rates start to stabilize in the spring market, we will see home prices remain steady and stay around these levels throughout the rest of the year. But if we see a significant mortgage rate reduction toward the end of 2023, we could see prices on homes begin to rise again and finish the year up overall,” says DiBugnara.

Will mortgage rates go down in 2023?

Average mortgage rates hit a two-decade high of 7.08% in November before taking a sharp downward turn. At the time of this writing, the average 30-year fixed rate was down to 6.31% according to Freddie Mac.

Some experts predict rates will continue hovering in the 6%-7% range throughout 2023, while others are forecasting a drop into 5% territory.

“I predict that rates will hover between 6% and 7% throughout 2023 without any major rate increases expected. Consider that the national historic average is 8%, which is still a decent rate historically,” Gelios says. “Factors that could affect whether or not rates go higher or lower include inflation, external influences like the Ukraine conflict, and overall market conditions.”

Eric Jeanette, president of Dream Home Financing, is among those who predict lower rates in 2023. “I foresee an average interest rate of 5.5% for a 30-year fixed conventional mortgage,” he says.

Keep in mind that mortgage rate movements are often proactive rather than reactive, and may have already baked in anticipated market changes.

If the Fed continues with its trend of smaller rate increases, “the market may have already factored in its peak, as rates are already beginning to move down,” points out Robert Maddox, partner and chair of the Banking & Financial Services Practice Group with Bradley Arant Boult & Cummings LLP.

But, as always, mortgage rates are volatile and could buck even the best projections.

“If the Fed continues to see stubborn consumer spending, then sustained rate increases could continue to move mortgage interest rates above 7%,” Maddox adds.

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Will housing inventory improve in 2023?

Spinelli notes that home inventory could potentially rise by as much as 6%-7% over the course of the year.

“Factors that will drive higher inventory include lower interest rates, an increase in new construction, and a rising consumer confidence,” she says. “The latter could potentially lead more homeowners to put their existing homes on the market, further increasing supply.”

Gelios is also bullish on inventory increasing.

“I predict housing inventory will rise by up to 30% in 2023 because more homeowners will consider selling. The ability to purchase a home without breaking the bank — even at a higher rate — will be the driver of this increase,” explains Gelios.

An increase in new builds could go a long way toward mitigating the inventory shortage. And DiBugnara is optimistic that more builders will finish a significant number of projects in the coming months.

“We will see inventory slowly but surely start to increase to at least pre-pandemic levels. This influx of supply could also have an impact on prices for 2023, depending on what interest rates do,” he notes. “If rates reduce, new home builds will most likely sell for originally planned prices, on average.”

But not all experts are on board with this theory. Albert Lord, founder and CEO of Lexerd Capital Management, expects that housing supply for new construction could decline by nearly 28% relative to 2022.

“The total supply will depend on new construction, investors’ appetite for rental income, and household preferences for a new home,” he explains.

Advice for homebuyers in 2023

Despite recent improvements in the market, continued high rates have kept many buyers on the fence. But keep in mind that even if rates stay elevated in 2023, home prices will probably come down, making a purchase more affordable.

“Mortgage interest rates are still historically good, and you shouldn’t put off buying a home hoping for rates to come back to 2.5%. That won’t happen again in the next few years, if ever,” says Maddox.

So, what should you do if you’re hoping to buy a home in 2023?

“Property location and the attractiveness of the surrounding community will determine property value — not the costs of financing. Remember that a solid property can be refinanced later when rates likely come down in 2024 and beyond.”

–Albert Lord, founder and CEO, Lexerd Capital Management

Set a budget and keep an eye on the market

“Keep up with mortgage rates, housing inventories, and consumer confidence, which can help provide a sense of what to expect in terms of rising or falling prices across different areas and price ranges,” suggests Spinelli. “Additionally, it’s important to identify your personal budget and what you are comfortable spending on a home and to research different financing options.”

You can learn more about affordable home loan options here.

Check your credit and get preapproved early on

If you’re considering a home purchase in the coming months, get your financial ducks in a row as early as possible.

“Prospective buyers should have their mortgage loan preapproval ready to go and be talking with their lender about how that preapproval could change in the near future,” advises Gelios. “With a higher interest rate, a buyer becomes approved for less money, so it’s crucial to be in regular contact with your lender about where rates are.”’

Jeanette also stresses the importance of checking and improving your credit score before you start the home-buying process. “Your credit score will play a major role in determining how much loan you can be approved for and at what terms,” he says.

Finally, home shoppers should be aware of all the expenses that come with purchasing a home — including upfront closing costs like the inspection, appraisal, and title fees, as well as ongoing costs like property taxes and homeowners insurance

Think long-term when house hunting

Lord recommends that buyers look long and hard for value when purchasing a property, regardless of mortgage rates.

“While elevated mortgage rates in 2023 may be a deterrent, property location and the attractiveness of the surrounding community will determine property value — not the costs of financing. Remember that a solid property can be refinanced later when rates likely come down in 2024 and beyond,” he says.

Jeanette agrees. “Focus on finding the right home without being so concerned about mortgage rates,” he says. “Finding the perfect home is not easy, but if you purchase that property at a time when rates are high, you can always refinance at some point.”

You can learn more about what to look for when buying a house here.

The bottom line

Expert predictions and recommendations can be helpful, but remember that the best move will depend on your financial circumstances and life needs. In other words, you should buy when it’s the right time for you — not when the market “says” it’s right.

Research your local real estate market carefully, enlist the help of an experienced agent who knows the area, and shop around carefully for a lender and loan, concentrating on more than simply the mortgage rate.

Finally, don’t be afraid to wait things out if the timing and finances just aren’t right. Pushing too hard and too fast to get a deal done in the hopes of avoiding higher rates or prices can backfire. Trust your gut as well as your real estate agent, and you’ll make the right decision.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.