Expect Housing Market to Crawl In 2023 Before It Can Run

December 07, 2022

Mortgage rates will eventually float back down to Earth near the end of 2023 — but not before home prices tally their first year-over-year decline in a decade and sales slump to the slowest pace in 12 years, according to a new housing market forecast from Redfin released Tuesday.

In 2023, stubbornly high mortgage rates will bring about a housing market in which existing-home sales plunge by 16 percent year-over-year, the slowest since 2011 when the “Great Recession” was still top of mind for Americans. But a modest rebound should begin by the second half of the year, according to Redfin.

Overall, the brokerage predicts a market that looks almost unrecognizable from early 2022, when mortgage rates clung to the historic lows of one year prior and demand for homes was still riding high after a frenetic 2021.

Home sales will continue their slump

Redfin predicts about 4.3 million sales of existing homes in 2023 — 16 percent less than this year.

Bet on the Midwest (and the Northeast)

While the West and South were the hottest markets of the pandemic years, they’ve since become too expensive for most residents considering relocating. For 2023, Redfin predicts more stable markets in the Midwest, like Chicago, and the Northeast markets, such as Upstate New York and parts of Connecticut to hold up the best and weather any downturns.

Rents will fall 

After soaring to new highs during the first half of 2022, Redfin predicts that rents will continue their downward trends thanks to increasing inventory, and that big landlords in large cities will begin offering concessions like a month of free rent or free parking before dropping asking rents.

The company also foresees that more people will become move-up renters, who will upgrade to bigger apartments or single-family rentals instead of buying properties due to high property costs.

Home values will decline, but a wave of foreclosures will not follow

Redfin foresees a median home value decline of about 4 percent to $368,000 nationally — which would be the first annual price decline since 2011 if it were to happen, mainly due to elevated rates and final sale prices starting to reflect homes that went under contract in late 2022.

However, very few homeowners are likely to find themselves underwater with next year’s predicted price declines. This is due to most homeowners, who have had their homes for a few years, securing their mortgages when rates were low and benefitting from soaring home values during the COVID-19 pandemic.

Most gains in multifamily rental buildings

Builders will shift away from the construction of single-family homes which they ramped up construction of during the pandemic and still need to offload, with Redfin predicting a 25 percent year-over-year decline in building permits and housing starts.

Constructing more multifamily rental buildings will make more financial sense for builders, Redfin predicts, as rental demand won’t fall as much.

Investor activity will fluctuate

Real estate investors will purchase about 25 percent fewer homes than they did this year, as the high-rate environment challenges their buy-low sell or rent-high business model, according to Redfin. iBuyers pulling out of the market as their business model faces existential questions will also slow activity.

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