Housing market forecasts: six experts assess the prospects of real estate in2023.

If in2021 "hot" was an overused word to describe the American real estate market, then openly cold could characterize its overall dynamics this year.

The real estate boom caused by the pandemic, which led to a40% increase in housing prices over a two-year period, began to slow down in the second half of the year as mortgage rates doubled compared to the beginning of the year. As the Federal Reserve sought to contain record-high inflation by raising interest rates throughout the year, rising mortgage rates contributed to growing divergence of expectations between buyers and sellers. Homes sat on the market for months as sellers continued to set prices for homes that buyers could no longer afford. Contracts were canceled, prices were lowered, and inventory levels fell. After reaching7% in October, mortgage rates have continued to decline over the last five weeks, which may provide some relief to buyers but may not compensate for still high housing prices.

What are the prospects for the real estate market in2023? We spoke to six experts about their forecasts.

Protect your assets: the best high-interest accounts in 2023.

The Federal Reserve System and mortgage rates

The Federal Reserve raised the key interest rate by half a percentage point on Wednesday, which was less than the previous four hikes, as inflation showed signs of easing. The Federal Reserve also indicated that the economy would face slowing growth, rising unemployment, and high inflation in 2023. Fragile growth typically leads to lower long-term interest rates, including mortgage rates, says Mike Fratantoni, chief economist of the Mortgage Bankers Association. "The housing market has definitely welcomed the recent drop in mortgage rates," he said. "This decrease reflects market expectations regarding the peak of short-term rates, as well as increasing signs that the U.S. is heading toward a recession next year."

Innovations in mortgage financing

Housing finance has reached a turning point, says Janneke Ratcliff, vice president of the Housing Finance Policy Center at the Urban Institute. She expects innovation to accelerate among lenders, startups, advocates, researchers, and lawmakers who are actively pushing the boundaries of what is possible in mortgage financing. "We are seeing pilot and new programs in alternative credit scoring, artificial intelligence, climate change adaptation, manufactured housing, and much more," she says. "The industry is not only recognizing issues of inequality, but many players are also actively stating their intention to close the homeownership gap between races." Ratcliff also anticipates an increase in the use of adjustable-rate mortgages, which accounted for 12% of total applications in November, compared to 3.3% in November 2021. "Future homebuyers should not be afraid of this financial tool," she says. "Its use has always been widespread, and the regulatory reforms implemented after the Great Recession have significantly reduced the risks associated with them."

Latest data on the real estate markets: mortgage rates, housing prices, and affordability

There are no "tsunami" forced sales.

Forced sales are the result of two simultaneous causes: the inability to pay, which leads to missed payments, and the lack of equity in the home, says Odeta Kushi, deputy chief economist at First American Financial Corp. When there is sufficient equity, a homeowner has the option to sell the house or use that equity to navigate temporary financial difficulties. The opposite situation—having no equity in the home without financial troubles that lead to missed payments—will again not result in a forced sale. Currently, homeowners have very high levels of equity, allowing them to weather potential price declines and also prevent housing-related financial difficulties from turning into forced sales, Kushi says.

Housing inventory will remain low.

Chronic housing supply shortages have become a key factor in price increases during the housing boom of the pandemic era and will remain a mainstay for prices in 2023, says real estate expert Jonathan Miller, who compiles the monthly Douglas Elliman Real Estate report in New York. "In previous periods of housing market downturns, the list of available properties was endless," Miller says. "Consumers are tied to the low rates at which they refinanced or bought homes during the boom. An oversupply is not a characteristic of 2023, because even with a moderate increase in the number of available properties, prices should be minimal." Redfin forecasts around 4.3 million home sales in 2023, which is fewer sales than in any other year since 2011, and a 16% decrease compared to the previous year.

Decrease in housing prices

Housing prices are expected to decrease in 2023, says Taylor Marr, deputy chief economist at Redfin. Marr anticipates that the median home sale price in the U.S. will drop by about 4% in 2023. Even with a 4% decrease compared to the previous year, housing will be much less affordable in 2023 than it was before the pandemic began, he states. "Given the projected prices and mortgage rates for next year, the monthly payment for the typical homebuyer will be about 63% higher than in 2019, just before the pandemic started." Housing prices are expected to decline the most in cities that experienced a boom during the pandemic, while markets in the Midwest and Northeast will hold up the best, according to Marr. The most significant price drops are anticipated in cities that saw an influx of new residents during the pandemic, such as Austin (Texas), Boise (Idaho), and Phoenix, as well as in expensive cities on the West Coast. At the same time, housing markets in relatively affordable cities in the Midwest and East Coast, particularly in Chicago and some parts of Connecticut and upstate New York, will remain relatively stable. "These areas are generally more stable than the expensive coasts, and they didn't heat up as much during the home-buying frenzy of the pandemic, which means they also have less potential for decline," he says.

Forecast for new housing construction

The start of single-family home construction in 2022 is expected to show a decline according to the calendar, marking the first such drop in 11 years, despite a persistent structural housing shortage in the U.S., according to the National Association of Home Builders. The Home Builder Confidence Index, measured by NAHB/Wells Fargo, has been declining for 11 consecutive months, indicating a continued reduction in housing construction in 2023. "Single-family home construction will ultimately lead the recovery of housing and overall economic growth in 2024, as interest rates decrease again, bringing demand back to the housing market," says Robert Dietz, chief economist of the National Association of Home Builders. Dietz also expects that the volume of multifamily housing construction will decline in 2023 after a very successful year in 2022. Multifamily housing construction, which accounts for over 95% of the total construction for rent, was successful in 2022 as mortgage rates increased and the availability of homes for sale worsened. "However, nearly 930,000 apartments are currently under construction, the highest level since January 1974," he says. "An increase in unemployment, a rise in apartment supply, a growing vacancy rate, and a slowdown in rent growth will slow multifamily housing construction next year."

Building conversion?

The conversion of commercial spaces into residential ones will remain more talk than action, according to Mark Norman, the deputy dean.