Housing Market Predictions 2023: Will Housing Prices Drop?

Updated: April 17, 2023

As we push on further into Q2 of 2023, we are here to answer some questions we had regarding the current 2023 housing market that we had at the end of last year and keep you up to date on the current housing market. In this blog, MCT experts divulge updates to pressing questions and make future predictions in regard to the most important topics in the housing market right now.


Updated Housing Market Predictions for 2023

Will interest rates go down? Are home prices going to drop? Will inflation go down? Read this market predictions for 2023 article to learn our analysis for the future, including our own survey analysis MCT conducted at the end of Q1 2023.

It is expected that 2022 will be characterized as one of the most volatile years in US housing history, but what can we expect and predict for 2023? Let’s explore potential outcomes as we dive deeper into the year!
Housing market predictions for Q2 2023

Will Mortgage Interest Rates Drop in 2023?

Update: Following the climb to 6.73% we saw at the beginning of March, interest rates seem to have cooled off a bit at the current 6.27%. The fluctuation in rates from what seemed like what was going to be a downward trending year seems to have the Fed believing there is still ample work remaining to be done. How high will interest rates go in 2023? The short answer, we have no idea.

The Fed did discuss the recent turmoil, with the Committee estimating that it will restrict credit going forward for households and businesses and will weigh on economic activity. The extent of these effects is uncertain, though the statement added that “the U.S. banking system is sound and resilient and the Committee remains highly attentive to inflation risks.”

Visual showing growth in mortgage market

At the beginning of 2022, the average U.S. home buyer could get a mortgage with an interest rate of just over 3%. By the end of December 2022, buyers were expected to pay twice (or more) as much in interest, more than 6.5% on average. It seemed to be going well before we saw an upward spike to 6.7% just last month due to the Fed’s interest rate hike. Now it seems interest rates are turning downward again, giving Freddie Mac’s mortgage market chart a sinuous line of uncertainty. Affordability remains close to a 35-year low. Real estate activity and consumer sentiment toward the housing market took a nosedive after mortgage rates surged above 7%.

To put the mortgage rate increases in an affordability perspective, for someone buying a $300,000 home with a 20 percent down payment, the rate moves we have experienced in 2022 change a monthly mortgage payment of $1,000 to a payment of more than $1,500. Given affordability problems, home prices should be falling more rapidly.

Homeowners who were potentially planning to relocate over the next few years can’t take their mortgage rate with them when moving to a new home, and there now exists a strong incentive to stay in their current home and hold on to their low-interest rate. As a result, fewer people are listing their homes for sale, which in turn is keeping home prices high even as the housing market has slowed by other measures. For those that were planning to stay in their homes for the long haul all along, there is also no incentive to refinance into a high rate.

For potential home buyers, the current market presents a myriad of issues. Rising interest rates are hurting buying power, there aren’t many homes to buy, the homes that are available are expensive, and not buying means paying rapidly increasing rent. The MBA applications index is down 84% since the end of 2021, which speaks to the effect of the surge in mortgage lending rates over that time frame.

Will Inflation Go Down in 2023?

Update: Based on recent CPI data, Inflation is predicted to go down to around 4% as we see the economy slow down due to the impact from rising interest rates, but as it is such a volatile market, experts aren’t extremely confident as of now.

The Fed is juggling the issue of lowering inflation without igniting a full-fledged recession. The more credit tightens on its own, the less the Fed will need to do to bring down inflation. Keep in mind that any general restriction of credit will take some time to play out. So far, the Fed is not seeing any decrease in credit from the banking crisis, and therefore they didn’t feel the need to pause or cut rates. The Fed facility and discount window lending are working as intended to provide liquidity to the banking system and aggregate deposit outflows from regional banks have stabilized. From a consumer credit perspective, the impact of further rate hikes will likely continue to be felt by borrowers, particularly in mortgages and credit cards.

When Will the Next Recession Start?

Update: Many experts in the industry predict the second half of 2023 for the next recession.

Due to our MCT led survey conducted at the end of March 2023, 49.5% of housing and secondary market experts said they believe the next recession will start in the second half of 2023. In addition, 29.3% believe it will happen within this quarter, 19.2% believe the first half of 2024, and 2% believe 2025 or later.

MCT Led Industry housing market Survey Results chart
When followed by the question, “What is the severity of the recession that you expect?”, the general consensus was 63.6% of experts claiming the next recession will be moderate, followed by 28.3% believing it will be mild, and 8.1% believe it will be severe.

Will Home Prices Drop in 2023?

Update: Home prices are expected to drop slightly as supply chains adapt to the current supply and demand in a volatile time. There could be a better balance in the supply chain which may level out home prices down the line, since we saw homebuilding rose in February by 9.8%.

visual showing housing price against inflation
A vast majority of homeowners in this country locked in a roughly 3% rate over the past couple of years. Those monthly payments will stay the same (most notably for 30-year fixed-rate mortgages) no matter what happens with interest rates, home prices or overall inflation.

For-sale inventory of single-family homes increased by its largest year-over-year margin since 2015 at the end of 2022, but that was due to homes staying on the market for longer rather than a surge of new listings.

Falling home prices have also forced builders to cut prices or offer some sort of incentive to move inventory. And as U.S. home prices fall, more and more buyers are underwater. Growth in home equity toward the end of 2022 was smaller than the increases recorded during the hot summer housing market.

Based on our own conducted research, experts in the housing market industry mainly believe that within the first half of 2024 the housing market will recover. Only 13.7% believe it will recover within the second half of this year.

Home prices will increase until they decrease demand, falling back to the new market equilibrium. The drop in sales has increased the monthly supply of new homes available for sale, helping alleviate the problem of affordability as it will help pressure prices lower. This move toward price equilibrium in housing is painful, but necessary.

Hopefully we see that the influx of new builds causes more opportunity for market share and the lowering of prices by 2024.

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Housing Market Forecast

Updated: Today, inflated prices, high-interest rates, and few active listings continue to make both finding and buying a house extremely difficult, and refinance appetite non-existent. While the current environment is not primed to change anytime soon, the peak of the Fed’s tightening cycle should help markets to price in lower yields and steeper curves. The trouble for the Fed is that there are excellent reasons for it to continue raising interest rates and excellent reasons for it to take a break. The fed funds futures now see a coin flip for another 25 bps hike in either May or June to get to a Fed funds rate of 5%, and then they see the Fed beginning to cut rates.
House in a shopping cart
Any decline in home prices will take some of the pressure off the inflation numbers, since housing is a key component to the inflation numbers.

Updated Housing Market 2023 Key Takeaways

  • Interest rates are seemingly trending downward again with today’s rate at 6.27% following an uptick last month to 6.7%, giving Freddie Mac’s rate chart a sinuous line of uncertainty
  • Inflation is predicted to go down to around 4% as we see the economy slow down due to the impact from rising interest rates
  • Many experts in the industry predict the second half of 2023 for the next recession and that it will be moderate
  • Home prices are expected to drop slightly as supply chains adapt to the current supply and demand in a volatile time

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