It’s tough to believe we’re nearing the end of 2022. What started as a booming real estate market at the beginning of the year, with mortgage rates still near record lows and a seemingly strong economic recovery post-pandemic, has given way to some severe headwinds since then.
As we’re closing out 2022, interest rates have risen to record-high levels, yet home prices have remained stubbornly high. Inflation is also breaking records, and there are starting to be signs of layoffs, although most economists feel these should stay limited to certain sectors, namely tech.
With all this bad news, it’s hard to think about buying a home, but could 2023 be the right time to do so? What will the real estate market look like as we head into a new year?
The following are some housing predictions to watch for.
1. Rising Prices Continue, But at a Slower Pace
Some would-be homebuyers are waiting to jump into the market, hoping that the economic conditions we’re starting to see form will mean lower home prices. A lot of analysts and economists say not so fast to this hope.
Home prices have been rising for over a decade and went up by double-digits for the second time this year. Part of propelling those soaring home prices was the record-low mortgage rates, but despite the rates rising, don’t count on declining home prices.
The bit of relief that may come is that the prices may go up at a slower pace. Home price growth is expected to be around 5.4% in 2023.
Even with a modest slowdown in price growth, the higher mortgage rates will cut into buying power. The expected monthly cost to finance a typical home for sale in 2023 will average more than $2,340. That’s a 28% increase over mortgage payments for typical homes in 2022, and it’s around double the typical payment a buyer would have gotten in 2021.
2. Increases in Inventory
While some bad news may be on the horizon in the housing market for 2023, it’s not all dire.
Inventories and available-for-sale homes are likely to increase. In October of this year, inventory increased by 0.5% over the previous year. If you exclude listings in different parts of the selling process but not yet sold or pending listings, the inventory of active homes on the market has increased by 33.5% over the previous year.
Inventory growth may go up by around 22.8% in 2023, but that will still be below the 2019 average.
3. Continued Rent Growth
There have been more than 13 months of double-digit rent increases, year-over-year. This summer, that slowed down to a single-digit level, but that doesn’t mean you can celebrate a rental market that will return to its pre-pandemic norms in the short term. The reason is that there is high inflation, significantly impacting rent, as well as a still-strong labor market.
Since the second part of 2021, the quarterly national rental vacancy rate has been around historic lows.
Rental vacancies increased slightly to 6% in recent data, but that still means a limited supply and a high demand.
Rental demand may be stronger in metro areas, particularly their urban centers, which is different from what we see in the sales market, where people are more focused on the suburbs.
4. Affordability Is the Key Decision-Making Factor
There will probably be fewer home sales in 2023 and fewer moves overall. When the economy is uncertain as it is now, people are more likely to hunker down. Sales are expected to be the lowest in a decade since home prices and mortgage rates may still be high.
If people consider purchasing a home in 2023, affordability will outweigh nearly every other criteria.
When relocating is an option for buyers, and they have flexibility, they may use it to find cheaper parts of the country to live.
5. Luxury Could Stay Strong
The housing market isn’t one big entity, there are many different markets. While entry-level markets will be the tightest, luxury properties can withstand the effects of higher interest rates more quickly, often because luxury buyers are buying in cash, or if they are getting a mortgage, the higher monthly payment isn’t as impactful.
The Potential Wildcards
Finally, there are a few wildcards that could change all the predictions. One is the mortgage rates, and most think they will go up more in 2023, but lower-than-expected rates could pave the way for a rosier housing market outlook.
Additionally, geopolitical issues like supply chain issues and the war in Ukraine could have positive or negative unexpected effects on the economy, affecting housing in either direction.