Housing Market Predictions 2023: Will Housing Prices Drop?

As 2022 ends, we’re preparing for the potentially volatile 2023 housing market and Robbie Chrisman, Head of Content at MCT, author of MCT’s MBS Market Weekly Commentary, has compiled his best market predictions for this blog post, based on a current analysis of the mortgage industry in December 2022. Read on for all our housing market predictions for the upcoming year.

Housing Market Predictions for 2023

Will rates decrease? Are home prices going to drop? When will the market crash again? Read on for our analysis and predictions on how 2023 may unfold in the housing market.

Looking back, nearly every company involved in residential lending has been impacted by higher rates, lower volumes, margins, and revenue, with a sense that 2020 and 2021 were indeed the best years the mortgage industry may ever see.

Housing Market 2023 Predictions Infographic

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!

Read this market predictions for 2023 article to learn our analysis for the future.

Will Mortgage Interest Rates Drop in 2023?

Experts predict a potential slight fall in mortgage interest rates this year following the latest drop this December to below 7%, though it is not known for sure if this moderate decline will continue. 


Visual showing growth in mortgage market

At the beginning of the year, the average U.S. home buyer could get a mortgage with an interest rate of just over 3%. Today, buyers can expect to pay twice (or more) as much in interest, more than 6.5% on average. 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 changes 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.

Are Home Prices Expected to Drop in 2023?

Though it may seem counterintuitive, the higher rate environment is dampening the pace of price corrections, due to its limiting effect on inventory inflow and subsequent restriction of home sale activity.

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.

visual showing housing price against inflation

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

There have been four consecutive months of home price pullbacks at the national level, though the pace of cooling has slowed considerably due to low inventory. The volume of new for-sale listings in October was 19% below the 2017-2019 pre-pandemic average, with the overall market still more than half a million listings short of what is ‘normal’ by historical measures.

New home sales are about 5% below the average seen over the past decade, but down roughly 25% from the 764,000 average seen over the past two years. Stay tuned to see if housing prices will continue to drop.

There have been four consecutive months of home price pullbacks at the national level, though the pace of cooling has slowed considerably due to low inventory. The volume of new for-sale listings in October was 19% below the 2017-2019 pre-pandemic average, with the overall market still more than half a million listings short of what is ‘normal’ by historical measures.

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 this year was smaller than the increases recorded during the hot summer housing market.

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.

Learn more about the current mortgage market by visiting our MCT industry blog

Housing Market Forecast

Keep in mind the last two years were little but an inflationary housing boom. Inflation surged to a 40-year high this year, while wages struggled to keep up, forcing Americans to cut back their spending. There has been rate volatility due to the Fed’s tapering, end of QE4, and economic uncertainty surrounding inflation.

Homebuyer demand has exhibited some elasticity as lower rates are beginning to get some potential buyers interested.

House in a shopping cart

If rates continue declining, more buyers may wade back into the market, as they’ll have lower monthly payments. Declining for-sale inventory, relief in mortgage rates, and relatively positive economic news may help stabilize home prices.

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.

It is hoped that the Fed will provide much more clarity on how soon and how quickly we can expect mortgage rates to come down in 2023. Investor sentiment seems to be giving up hope for relief from the Federal Reserve’s tightening campaign.

Since only a small decline in home prices is expected next year, mortgage rates will dictate housing affordability, and as a result, demand and sales.

House Market 2023 Key Takeaways

  • As the Fed raised 50 BPS at the end of this quarter, we are likely to see a rise in inflation as well as a recession in the horizon.
  • We may see interest rates dip in 2023 following this December’s drop to below 7%, though it is unclear when and how much they will start to fall to pre-COVID levels.
  • Refinances will continue to be low considering interest rates are still high.
  • High home prices have already decreased demand and it is going to take more supply hitting the market to get prices back in equilibrium. A potential decline in home prices might make inflation drop.

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