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5 Housing Market Predictions for 2023 You Should Know

01/12/23

The story of the next year: Home buyers will find creative ways to make mortgage payments work for them.

 

Even though 2022 is behind us, some of its challenges, like tight housing inventory and volatile mortgage rates, aren’t over. But there’s promising news for first-time buyers in 2023: Trends are pointing to a stabilization of the home affordability crisis.

“Americans finding ways to make payments on a roof over their heads will drive the market next year,” says Zillow chief economist Skylar Olsen. “Affordability is going to be the biggest factor in housing for 2023, but there’s room for optimism on that front if mortgage rates recede.”

In other words, hopeful home buyers are looking for less-expensive workarounds to buying homes in an environment with higher interest rates (currently hovering over 6% for 30-year fixed). For example, in 2023, we’re expecting to see more people buy a home with friends or family members in order to spread out expenses beyond just one income. Most of our housing predictions focus on this creativity.

With this in mind, here are five housing market predictions for 2023.

  1. Housing affordability will improve slightly

First, the good news. While high monthly mortgage costs and low inventory will continue to influence the housing market in 2023, there are signs conditions may stabilize. Home values aren’t expected to be on the wild ride upward we saw last year. National home prices are predicted to remain flat, and they may even fall in some areas.

More promising is that as inflation shows some signs of easing, mortgage rates are beginning to trend slightly downward. In the very near term, however, mortgage rates are expected to continue fluctuating, which can make it challenging to shop for a home within a guaranteed budget over a span of several months. Best-case scenario? Rates continue to trend downward throughout the year, helping to make affording a home within reach for more buyers.

  1. The Midwest will grow in demand

Most Midwest metropolitan areas haven’t seen extreme increases in home prices compared to almost all other areas in the United States. This is why one of our housing market predictions for 2023 is more home buyers will look to places like Iowa, Missouri, Illinois, Kansas and Ohio for an affordable home.

With the one-two-punch of affordable housing prices and reasonable mortgage costs, these states should be at the top of the list for first-time home buyers. In many Midwest metro areas, including cities like St. Louis, Missouri, and Toledo, Ohio, mortgage-to-income ratios are well below the national average. This means the median home buyer is typically spending less than a third (30.2%) of their income on mortgage payments — and in many cases it’s as little as one-fifth (22%).  These metros also have decent housing inventory, with home sellers more willing to list their homes than in other parts of the country.

Metro areas in parts of Pennsylvania and New York also have more affordable homes, making it potentially easier to attain a down payment. Monthly mortgage rates in these areas are also lower than the national average.

  1. More friends and family will buy homes together

A Zillow® survey found that 18% of successful home buyers purchased with a friend or relative who wasn’t a spouse or partner, and it’s easy to see why: Buying a home with someone else can help boost your debt-to-income ratio (one of the main qualifying factors for a home loan). Co-buyers can also consider combining funds from multiple accounts to make up a larger down payment. Last year, we talked to real estate broker Alecia Pillatos about how she successfully bought a home in a Seattle suburb with a friend and then a second home with her sister-in-law. Expect more would-be home buyers to go this route in 2023 as they look for creative ways to ease the costs of purchasing a home. 

If you’re one of the 19% of would-be home buyers looking to buy with a friend or relative in 2023, check out Zillow’s guide before taking the plunge.

  1. New construction buyers may have more choice and even bargains  

For new construction shoppers, this is possibly one of the most important housing market predictions for 2023: An uptick in production could lead to discounts. Here’s why: New homes currently under construction are up 50% since February 2020, and completed homes are being delivered to the market even as buyer demand has waned. This oversupply could also mean existing home shoppers see price reductions in some markets.

The not-so-good news for buyers hunting for an existing home in the coming year? They may lack choice. Inventory levels of existing homes will remain low if sellers hold on to their homes to avoid having to trade for a higher mortgage rate. 

Learn more about how to find a bargain-priced home.

  1. More homeowners may leverage their home as a source of income

You may discover that the home you love could be worth more to you as a rental. One reason for this is that rental prices are expected to rise higher than home values over the course of the year, meaning the typical rent in your area may be higher than your monthly mortgage payment.

In fact, in our 2021 survey of home buyers, approximately one-third of respondents mentioned the opportunity to rent out their home as a crucial reason for their purchasing decision. Many buyers took advantage of record-low mortgage rates in 2020 and 2021 by purchasing second homes, some capitalizing on the opportunity to cover their mortgage payments with rental income. Even would-be sellers may instead choose to hold onto their current home and use it as a rental, as higher mortgage interest rates shrink the buyer pool.