2022 was a dynamic and fast-paced year for the housing market. In the first quarter of the year, low interest rates drove a buying frenzy, causing home prices to soar 20.9% year-over-year in March 2022. At the same time, inflation skyrocketed to a 41-year high of 8.5%.
In a bid to tamp down rising prices, the Federal Reserve raised the federal funds rate seven times within the year. The unprecedented velocity of rate hikes caused mortgage rates to double, and the cost of a 30-year fixed-rate home loan rose from a low of 3.22% in the first week of January to a staggering 6.42% by the last week of December.
As rates climbed, housing affordability suffered significantly, sidelining many would-be homebuyers. As a result, mortgage demand slumped by 13.2% in December 2022, hitting the lowest level recorded in 27 years.
Though 2022 is finally behind us, one big question remains on every investor’s mind: what’s in store for the housing market in 2023? Will this year usher in some tranquility, or should we strap in for another rollercoaster ride?
Looking ahead: the housing market in 2023
The 2023 housing market will present both challenges and opportunities for investors. On one hand, mortgage rates remain elevated, and inventory—despite the recent drop in homebuyer demand—continues to be tight.
But with rental rates slowly rising, home prices declining, and demand for rental housing growing across large swaths of the country, the housing market remains ripe with potential. Here are some key trends to watch out for in the 2023 housing market.
Mortgage rates could head lower
After rising again to more than 7% in early November, interest rates have been on a slow-but-steady downtrend. The 30-year fixed-rate mortgage dropped to 6.33% in the week ending January 12th, following a 6.48% print in the previous week.
While mortgage rates are not expected to fall to the pandemic-era lows of 3% or 4%, they’ll likely level off in 2023. Housing experts have varied predictions, with Realtor.com forecasting 30-year rates of 7.1% by the end of 2023. The National Realtors Association (NAR) and Freddie Mac, meanwhile, anticipate rates to average 5.7% and 6.4%, respectively, over the coming year.
On the other hand, the Mortgage Bankers Association forecasts a lower average of 5.2% in 2023, followed by an even more moderate 4.4% in 2024.
Whether mortgage rates edge lower and stabilize will largely depend on the Fed’s success in managing inflation. Although inflation has declined for six consecutive months to reach an annualized rate of 6.5% in December 2022, it’s still far from the Fed’s target of 2%—a signal that further (though less aggressive) rate hikes may be on the table in 2023.
Housing values may level off
The housing market is experiencing a trend shift. Following a decade of steady growth, home prices declined by 2.4% between June and October 2022. This change in trajectory is likely to continue into 2023, as reduced buyer demand is expected to naturally and gradually cause prices to fall further.
However, experts’ forecasts for home prices in 2023 are mixed. Redfin, a real estate brokerage, predicts home prices will likely fall by 4% in 2023. On the other hand, the Mortgage Bankers Association’s FHFA U.S. Price Index projects a more modest 0.6% year-over-year decrease in housing prices nationwide.
Meanwhile, Realtor.com foresees an increase of 5.4% in median home prices in 2023. Similarly, Corelogic and NAR—two leading providers of housing data—also forecast that prices will rise by 2.8% and 0.3%, respectively, in the coming year.
While housing inventory has ticked up in the past year, it’s still limited, which may help mitigate any significant price drops. For this reason, the extent to which home prices will decrease (or remain level) in 2023 will likely be determined by mortgage rates as opposed to changes in inventory.
Home sales could continue to sag
Skyrocketing rates and stubbornly high prices hurt housing affordability and kept buyers out of the market in 2022.
In fact, since February 2022, existing home sales have declined year-over-year, falling to just 6.18 million units in December. This trend will likely spill over to 2023 as buyers continue to battle with high mortgage rates and prices.
According to the National Association of Realtors, existing home sales are projected to fall by 6.8% year-over-year in 2023, bringing the number of sales for existing homes down to 4.78 million units. Similarly, Redfin predicts an even greater decline of 16%—a figure that would result in 2023 sales of 4.3 million units.
For well-capitalized investors and homebuyers looking to enter the housing market in 2023, however, a continued decline in home sales could be a welcome—rather than worrying—sign. As the bulk of buyers slowly shy away from buying real estate, those who are left will face less competition—making red-hot seller’s market shenanigans like waived contingencies and bidding wars a thing of the past.
In other words, it’s easier to be a buyer in a cooling market than a warming one—a development that enterprising investors will be quick to use to their advantage.
Landlords may see moderate rent growth
The rental market slowed in the final months of last year, with the nationwide median asking price of rent increasing by just 4.8% on a year-over-year basis in December 2022.
However, in Alabama, rent growth was more pronounced. In 2022, rents across the Yellowhammer State grew by double-digit rates. In metro areas like Birmingham, rent growth outpaced the rate of home price increases by 90%—the first time this had occurred in more than two decades.
Similarly, rent growth in areas like Huntsville topped the nationwide average. Numbers from Rent.com indicate that the median monthly rent for a studio apartment in the Rocket City is $629 in January 2023—an increase of 7.7% from the $584 price tag twelve months ago.
Data from Atlas Rental Property, our leasing subsidiary, corroborates this claim. In 2022, rents earned by our properties in Alabama and northern Tennessee increased by an average of 14.2%, or $127 per unit.
As we continue into 2023, the demand for rental housing could continue to accelerate. Unaffordable home prices and the high cost of borrowing are forcing many prospective homebuyers to remain renters—a factor that could drive up the price of rent.
The Federal Reserve Bank of Dallas, for instance, predicts significant rent inflation in the 2023 housing market, with an 8.4% year-over-year uptick by May 2023. Likewise, the National Association of Realtors and Realtor.com anticipate rents to grow by 5% and 6.3%, respectively, in 2023—outpacing the rate of rent growth in the previous year.