What should we expect from the housing market in the second half of 2023?

The U.S. housing market in the second half of the year will hinge on two familiar words: mortgage rates. In the first half, high rates have caused the market to stagnate as the cost of borrowing has deterred potential buyers, and owners with mortgage rates of 3% or lower are reluctant to sell and face having to borrow for their next home at interest rates close to 7%.

Main findings:

• Experts expect mortgage rates to level off by the end of the year at around 6%.
• A new trend of internal migration to Sun Belt cities is expected to continue.
• The construction of new single-family homes will partially meet the need for residential real estate.
• Despite strong demand and falling home prices, the market is still relatively slow for the peak period of the year.
• Although new construction is increasing to meet the demand for single-family homes, it is not enough to meet current market needs.

What's in store for homebuyers in the second half of 2023? While the Federal Reserve plans to continue raising rates through the end of the year, experts predict lower mortgage rates and a corresponding increase in home purchases as prices fall and affordability improves. Still, few expect a recovery that would allow the market to catch up with the pace of activity seen in the U.S. in 2022.

The rates will determine the trajectory of the market. The Federal Reserve is signaling possible further rate hikes before the end of the year. As rate hikes slow or stop, affordability problems will begin to gradually ease, said Daniel Hale, chief economist at the National Association of Realtors. "It means that affordability will start to improve, but not drastically," Hale said. Experts foresee a more stable movement in mortgage rates. Given the expected decline in inflation, mortgage rates are expected to decline. Another peak is expected in June, but Hale predicts this could be the last rise before things level off. "We believe June will be another temporary peak in mortgage rates, and we will see a gradual decline from the 6.7% level to around 6% by the end of the year, probably just above 6%," Hale said in an email. That leveling off of about 6% will help home buyers who have been waiting on the sidelines get back into the market, says Lawrence Yun, chief economist at the National Association of Realtors, but it may not be enough to eliminate the housing shortage for now. "This will help to increase the demand for and supply of housing. For owners who need a new home (e.g., newborn baby, new job in another part of town, etc.) but don't want to sell due to low interest rates, the cost of moving becomes less expensive with lower mortgage rates," Yun said in a statement provided to Investopedia.

Expect to increase inventory to meet strong demand. As mortgage rates cool, inventories are expected to increase in the second half of the year.

Home prices are expected to decline. Weak home price growth is expected during the summer months, when home prices are typically at their peak, according to Hale's projections. "Specifically, while June is expected to be the seasonal peak for home prices in 2023, like most years, we won't see as large of a monthly increase as we did in 2022, which means a gradual decline in home prices compared to the same period a year ago," Hale said. Price declines are expected through early fall, depending on Federal Reserve action. "By the fourth quarter, mortgage rates and seasonal declines in home prices may be enough to stem the decline in prices," Hale added. "Overall, we expect the average home price in 2023 to decline 0.6 percent from 2022. "

As supply increases and mortgage rates and home prices decline, sales are expected to increase through the end of the year, according to Yun. "We are likely approaching the day when home sales bottom out, followed by a steady improvement in sales in the second half of the year and into 2024," Yun said.