Redfin's 2023 Housing Market Predictions
In the past year, rising inflation and soaring interest rates have spilled into the turbulent housing market.
Just a year ago, mortgage rates set near record lows as home prices soared. Now, interest rates near 7%, while home prices have jumped nearly 40% since March 2022.
Unsurprisingly, that level of home growth is unsustainable in the current market. Now, there’s hope that the housing market is slowing down – albeit gradua
Is the housing market slowing down?
Home values and a long-term shortage
Usually, when interest rates climb, home prices fall to compensate. Unfortunately, this hasn’t been the case in 2022.
One of the biggest reasons is a simple matter of supply and demand.
Even before the pandemic hit, the U.S. grappled with a housing shortage. The National Association of Realtors (NAR) predicted in 2021 that a whopping 5.5 to 6.8 million new homes were required to fill the gap.
As a result, home values may remain elevated. Though fewer people can afford to buy, supply shortages will likely constrain price declines to marginal levels. That said, with a more secure job market and improved application eligibility compared to the 2008 crisis, it’s unlikely that foreclosures will hit en masse.
However, that doesn’t mean home prices won’t – or haven’t – come down a little.
According to the S&P Case-Shiller Index, home values increased 7.8% YOY in September 2022. However, between June and September, prices fell 2.6%, indicating that some relief is on the way.
These declines were more pronounced in cities where homes had further to fall. San Francisco and Seattle saw three-month declines of 10%, while Denver and LA slipped around 5.6%.
Prediction #1: Home sales will fall to their lowest level since 2011, with a slow recovery in the second half of the year
We expect about 16% fewer existing home sales in 2023 than 2022, landing at 4.3 million, with would-be buyers pressing pause due mostly to affordability challenges including high mortgage rates, still-high home prices, persistent inflation and a potential recession. People will only move if they need to.
Prediction #2: Mortgage rates will decline, ending the year below 6%
We expect 30-year fixed mortgage rates to gradually decline to around 5.8% by the end of the year, with the average 2023 homebuyer’s rate sitting at about 6.1%.
Prediction #3: Home prices will post their first year-over-year decline in a decade, but the U.S. will avoid a wave of foreclosures
We expect the median U.S. home-sale price to drop by roughly 4%–the first annual drop since 2012–to $368,000 in 2023. That’s due to elevated rates and final sale prices starting to reflect homes that went under contract in late 2022. Prices would fall more if not for a lack of homes for sale: We expect new listings to continue declining through most of next year, keeping total inventory near historic lows and preventing prices from plummeting.
Prediction #4: Midwest, Northeast will hold up best as overall market cools
Housing markets in relatively affordable Midwest and East Coast metros, especially in the Chicago area and parts of Connecticut and upstate New York, will hold up relatively well, even as the U.S. market cools. Those areas tend to be more stable than expensive coastal areas and they didn’t heat up as much during the pandemic homebuying frenzy.
Prediction #5: Rents will fall, and many Gen Zers and young millennials will continue renting indefinitely
We expect U.S. asking rents to post a small year-over-year decline by mid-2023, with drops coming much sooner in some metros. Some large landlords are likely to offer concessions, such as a free month’s rent or free parking, before dropping asking rents.
The rental price declines will be partly due to increasing supply, which has already led to an uptick in vacant units in apartment buildings. Multifamily construction is at a 50-year high, which means hundreds of thousands of new rental units will be available next year. Another factor is reluctance to sell: Many homeowners will rent out their homes rather than sell because they don’t want to lose a low rate. There will be an influx of single-family homes for rent.
Prediction #6: Builders will focus on multifamily rentals
Builders will continue to pull back on constructing new homes next year, with year-over-year declines of roughly 25% in building permits and housing starts continuing into 2023.
Builders will back off most from building new single-family homes. Construction of single-family homes surged during the pandemic, which means builders need to offload the homes they have on hand without adding more supply to limit their financial losses. They’ll pull back dramatically in some markets like Phoenix and Dallas, where they built too many homes in anticipation of demand that’s failing to materialize.
Prediction #7: Investor activity will bottom out in the spring, then rebound
Real estate investors will purchase about 25% fewer homes than a year earlier, with purchases likely to bottom out in the spring. Investors’ business model is to buy low and sell–or rent–high, and the cash they borrow to buy homes outright is no longer cheap. Fewer iBuyers in the market–Redfin recently announced plans to shutter its iBuying business–is also a factor in slowing activity. Some investors, especially newer and smaller ones, will bow out of the housing market entirely and others will slow their activity. But if inflation slows and the Fed eases up on rate hikes as expected, investors will likely start buying more homes in the second half of the year, taking advantage of slightly lower home prices.
Prediction #8: Gen Zers will seek jobs and apartments in relatively affordable mid-tier cities
Gen Zers are entering into a workforce with more remote-work opportunities than ever before, which means they’ll have more flexibility in where they’ll choose to start their careers than older generations. They can prioritize things like affordability, lifestyle, weather and proximity to family.
Nearly one-third of adult Gen Zers live with relatives, partly because inflation and high housing costs make it hard to afford living alone. That will allow some Gen Zers to save money in the long run and eventually use it to move where they want to. They can choose low-cost-of-living places –or even places that have paid remote workers to move in, like Tucson, AZ or Savannah, GA. Mid-sized, moderately priced places like that will be popular when more Gen Zers age into homeownership–though it will remain difficult for young first-timers to buy homes because prices and rates make it more expensive than it used to be.
Prediction #9: Migration from one part of the country to another will ease from the pandemic boom
We expect the share of Americans relocating from one metro to another will slow to about 20% in 2023, down from 24% this year. That’s still above pre-pandemic levels of around 18%.
In 2023’s slow market, there won’t be a next Austin. Even Austin isn’t Austin anymore: The wave of homebuyers moving into Austin has slowed to a trickle, as many people are now priced out and many remote workers who wanted to relocate have already done so. Plus, some workers, especially 20-somethings starting their careers, will choose to remain near their office as some employers start expecting in-person work, at least part of the time.
Prediction #10: Rising disaster-insurance costs will make extremely climate-risky homes even more expensive
Some Americans will be priced out of climate-risky areas like beachfront Florida and the hills of California because of ballooning insurance costs. We expect disaster-insurance rates to continue rising next year (and beyond), rendering housing in some areas more expensive.
The increasing frequency and intensity of natural disasters has prompted some insurers to stop providing coverage in risky areas altogether, and others to raise rates for flood and fire insurance. Florida property insurance premiums increased 33% year over year in 2022, and they’re expected to rise more after Hurricane Ian wreaked havoc on parts of coastal Florida in September. Americans with FEMA flood insurance–especially those in Florida, Mississippi and Texas–are also starting to see their flood insurance premiums increase after the government agency overhauled its pricing. In California, many private insurers have stopped covering high-fire-risk homes, which means many homeowners and buyers must use a last-resort plan and spend two to three times more on premiums.