According to Zillow, many local markets may still see home prices increase in 2023. However, these increases may occur at a much slower pace than in recent years.
In commercial real estate, demand is still high for warehouses and industrial space. However, rent growth is likely to slow from its scorching pace in 2022.
The housing market will face a number of challenges in 2023, including supply shortages and rising mortgage rates. These factors could affect homeowner demand and lead to lower prices. However, many experts believe that the supply shortage is temporary and will ease as the economy recovers.
In the short term, homeowners are likely to remain hesitant to sell their homes. This is because they want to be close to their families, and home prices are still high. However, this trend is unlikely to last long, as higher interest rates and high prices are pushing buyers away from the market.
As the housing market cools, new construction will continue to decline. This is due to labor and materials shortages, as well as uncertainty about the future of the economy. This trend will likely continue through 2023. In addition, many cities and states are changing their zoning laws to allow homeowners to build accessory dwelling units (ADUs) on their property, which can be used as additional living space or income-generating rental units.
As the real estate market slows, rents will continue to increase. This is because of the housing shortage, low vacancy rates, and high mortgage rates. In the long run, this trend could result in a severe drop in housing prices and lead to the largest correction since the Great Recession.
Many homebuyers have been waiting on the sidelines for mortgage rates to fall in hopes that they can afford a better deal. But it’s unlikely that will happen this year.
In fact, mortgage rates have started to stabilize and buyers are becoming acclimated to the higher interest rate environment. That’s why some experts believe that instead of the long-anticipated housing market crash, we could see a more gradual rebalancing over the course of 2023.
This doesn’t mean that prices will rise, but it will mean that those who want to buy a house will be able to do so without breaking the bank. It will also mean that some sellers will be more willing to put their homes on the market, shaking up the Catch-22 that’s kept new listings low as homeowners wait for a sale.
But it’s still too early to tell whether that will be enough to jumpstart a housing market rebound. It will also be dependent on how much more mortgage rates rise and if would-be homebuyers are able to qualify for a loan when rates do go up again. In the meantime, a lot of people are just content to stay where they are rather than risk losing their jobs or having to move to find more affordable housing. That’s good news for buyers, but not so great for the real estate industry.
Rising interest rates
Interest rates are expected to stabilize and decline from their peak in late 2022, and home prices will moderate after skyrocketing during the pandemic. Buyers who were on the sidelines will reenter the market as mortgage rates fall and home prices ease. This trend should benefit areas that didn’t experience a homebuying frenzy during the pandemic, such as the Midwest and the South, which tend to have more affordable housing.
However, higher mortgage rates could depress sales activity in the real estate sector, particularly for commercial properties. “The booming commercial sector slowed to a standstill during the last few months of 2022 due to the consistent rate increases, and it’s unlikely to pick up again until we see more stable rates,” says Mark Sharga, director of real estate finance for Ameriprise Financial.
Even though buyer demand is still greater than the current housing supply, a limited amount of homes available for purchase will keep home prices elevated in most areas. For example, the cost of buying a single-family house after putting down 10% now consumes 30% of the median household income. As a result, home affordability will remain challenging for buyers next year.
Home prices will continue to rise but at a slower pace in 2023 than last year, according to several experts. This should give buyers more negotiating power as sellers may be willing to offer buyer-friendly concessions to make their homes more appealing to potential buyers.
However, mortgage rates will keep home affordability a concern for many homeowners next year. The median home price is expected to increase by about 5.1% in 2023, and the typical mortgage payment will consume 30.2% of a buyer’s income. That’s up significantly from last year, when the median home cost was only 20% of a buyer’s income.
The good news is that mortgage rates are expected to moderate next year, but home sales will likely sag under persistent inventory shortages and elevated borrowing costs. Economists shared their outlook during the National Association of Realtors’ (NAR) Real Estate Forecast Summit in February.
However, local market dynamics often override national housing market trends. Your Ameriprise financial advisor can help you evaluate the impact of broader economic factors on your own real estate investments. Please don’t hesitate to reach out.