The Housing Market Could Be a Lot Cooler in 2023, And Here’s Why

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The housing market is cooling down.

You’ve probably heard this phrase a time or two over the past few weeks. It seems to be the “hot new story” lately, when it comes to real estate reporting.

And it’s true. Numerous reports in recent weeks have shown that the U.S. housing market is clearly slowing down. This cooling trends follows two years of overheated sales activity and record price growth. So, to be honest, it couldn’t come at a better time.

As for a long-range outlook, we expect the real estate market to continue cooling through the rest of this year and into 2023.

Outlook: A Cooler Housing Market in 2023?

The U.S. housing market will likely be much cooler in 2023 than it has been over the past couple of years. Many factors will drive this trend, and housing costs top the list.

The short version is that it costs a lot more to buy a home today than it did just four or five years ago. Rising prices play a role here, and higher mortgage rates have added insult to injury.

Here are three reasons why we could see a much cooler real estate market in 2023.

1. Mortgage rates have nearly doubled in 2022.

Rising mortgage rates have slowed down the real estate market over the past few months, and this trend could continue into 2023.

During the first half of this year, the average rate for the popular 30-year fixed home loan rose by more than 2%. Rates have nearly doubled since the first week of January. And while they’re still considered to be low from a historical standpoint, this increase has caused some noticeable cooling within the housing market.

The Federal Reserve has already raised the short-term federal funds rate in 2022, and many economists expect them to announce additional rate hikes later this year. This could lead to a further increase in mortgage rates as well, indirectly.

But whether or not rates climb any higher over the coming weeks is sort of a moot point. They’ve already risen significantly in 2022, and that has caused the red-hot real estate market to cool down considerably.

According to a recent report from the national real estate company Redfin:

“The [housing market] cooldown is largely because mortgage rates nearly doubled in the first half of the year, reaching nearly 6% in June. That caused the monthly mortgage payment for a typical homebuyer to surge 45% year over year to $2,459 in June and priced many buyers out of the market.”

This cooling trend will likely carry over into 2023, especially if home prices continue to climb. The bottom line is that it costs a lot more to buy a home these days, compared to just a couple of years ago. And that’s led to a reduction in demand, especially among first-time buyers with tight budgets.

2. Home prices have hit record highs in most U.S. cities.

Home prices in the U.S. have risen sharply over the past couple of years. Oddly enough, the COVID pandemic actually accelerated price growth in cities nationwide, by creating a surge in home-buyer demand.

Now, as we move further into the summer of 2022, the average house price in America has risen to an all-time high.

According to Zillow, the median home value for the U.S recent climbed above $350,000 for the first time ever. This follows a gain of nearly 20% over the past 12 months alone. In some of the nation’s hottest housing markets, prices rose by more than 30% last year. These are unprecedented figures.

When house prices rise substantially in a short period of time, it tends to reduce demand among home buyers. Some buyers find themselves priced out of the market entirely. Others choose to put their home-buying aspirations on hold, out of frustration.

Many economists expect home prices to continue rising through the end of this year and into 2023 — but at a slower pace than last year. Rising housing costs have had a cooling effect on real estate markets across the country, especially in pricey areas like the San Francisco Bay Area.

If prices continue to climb, the housing market could be even cooler in 2023 than it is right now. Higher prices mean fewer buyers, and this could cause a general slowdown within the real estate scene.

3. More homes are coming onto the market in 2022.

Finally, some good news for home buyers. In a report published last month, researchers from Realtor.com said that housing inventory nationwide has risen substantially.

To quote their June 2022 report:

“The inventory recovery made major strides in June, with the number of homes available to buyers climbing at its fastest yearly pace of all time…”

According to Realtor.com’s data, the total number of active real estate listings rose by nearly 19% last month, compared to a year earlier. This is the latest in a series of reports that have shown an increase in the number of homes for sale.

The biggest year-over-year inventory gains occurred in hot housing markets like Austin (+144.5%), Phoenix (+113.2%), and Raleigh (+111.7%). Read our full report on that subject.

Granted, most real estate markets across the country still favor sellers due to tight inventory conditions. But we could see more balanced conditions later this year and into 2023.

This kind of trend tends to have a snowball effect. As more properties come onto the market, sellers begin to feel the pressure. Price reductions become more and more common. Bidding wars and multiple-offer scenarios start to diminish. And suddenly, we have a very different market.

Disclaimer: This report contains long-range predictions regarding home prices and other housing market conditions. Such views are the equivalent of an educated guess. The Home Buying Institute (HBI) makes no claims or assertions about future real estate trends.