Could We See a New Kind of Buyer’s Real Estate Market in 2023?

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  • We could see a new kind of buyer’s market in 2023.
  • There are signs that the real estate market is cooling.
  • Home sales have declined, while price reductions have increased.
  • Next year, buyers will likely have more negotiating leverage.

For the past two years or so, we’ve heard countless stories about the strong seller’s market conditions in cities across the U.S. Record-low inventory levels and surging demand forced buyers to compete fiercely with one another and led to unprecedented price growth nationwide.

But now, it seems that change is in the air. A growing number of real estate industry reports have shown that the red-hot housing market might finally be cooling down.

In fact, some cities across the U.S. might see a new kind of buyer’s market in 2023. Inventory levels will likely remain below historical norms for the foreseeable future. But rising prices and higher rates should reduce the number of buyers, shifting the dynamic between supply and demand.

Yes, the U.S. Real Estate Market Is Cooling

As of early summer 2022, we’re seeing a number of significant changes within the U.S. real estate market. Inventory has risen and homes are taking longer to sell in many cities.

Here are five ongoing trends that could affect home buyers well into 2023:

  • Slower price growth. A growing number of analysts have predicted slower home-price growth through the rest of this year and in 2023. Prices could even drop in some of the nation’s hottest real estate markets. Mark Zandi, chief economist at Moody’s Analytics, recently said that his firm expects U.S. home prices to drop in markets that are the most “juiced” or overvalued.
  • Fewer home sales. Realtor.com recently reported that U.S. home sales declined in May, for the fourth month in a row. Lawrence Yun, the company’s chief economist, wrote: “Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year…”
  • More priced reductions. Sellers seem to sense that the market is cooling. Price cuts by sellers were seen in 10.5% of homes in May of 2022, up from 6.2% in May of 2021. LendingTree senior economist Jacob Channel recently stated: “Fewer people are getting mortgages, homes are sitting on the market for longer and some sellers are cutting prices.”
  • More inventory. Of all the factors that could create buyer’s real estate market conditions in 2023, inventory tops the list. For the past two years, buyers have been frustrated by record-low inventory levels. But now, more and more homes are coming onto the market. A June 2022 Realtor.com report said: “New data suggests the U.S. housing market hit a turning point in its supply struggle in May, as active inventory recorded the first year-over-year increase since June 2019.”
  • Higher mortgage rates. At the start of this year, the average rate for a 30-year fixed mortgage loan was 3.22% (source: Freddie Mac’s weekly survey). Last week that average was up to 5.81%, an increase of more than two full percentage points. Higher rates and home prices could further reduce buyer demand going forward.

All of these trends could create a more balanced and “buyer-friendly” housing market during the second half of 2022 and into 2023. We probably won’t see anything resembling a traditional buyer’s market for quite some time. Instead, next year could bring real estate market conditions unlike anything we’ve seen in the past.

Higher Costs Have Reduced Demand

Housing costs have increased substantially over the past couple of years, partly driven by a pandemic-fueled surge in home buying activity.

The chart below shows the U.S. median home value going back ten years, as measured by the real estate data company Zillow. Note the steep acceleration in price growth that started in 2021. As a result of that trend, more and more would-be buyers have been priced out of the housing market.

Home price chart June 2022
Chart: Median home price in the U.S. | Source: Zillow.com

The next chart shows the average rate for a 30-year fixed mortgage loan over the past year. It’s based on the weekly mortgage industry survey conducted by Freddie Mac. Notice how much higher rates are now (right side of chart) compared to early January of 2022.

Mortgage rate chart June 2022
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

The bottom line is that home-buying costs have surged over the past couple of years. This has slowly but surely reduced the number of buyers who can afford to make a purchase. Going forward, this reduction in demand could shift the housing market in a way that begins to favor buyers for a change.

A New Kind of Buyer’s Market in 2023?

Many economists have predicted a more balanced real estate market in the months ahead. In June, for example, researchers from Freddie Mac issued the following statement:

“Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.”

In 2023, we could see a new kind of buyer’s real estate market in many U.S. cities. Historically speaking, a “buyer’s market” occurs when supply exceeds demand. It’s when the number of houses for sale is greater than the number of buyers looking to purchase them.

That’s unlikely to happen in 2023. It will be quite some time before the current supply shortage turns into a surplus. Even so, we could see a new kind of situation where buyers have increasingly more negotiating leverage despite tight inventory conditions.

Sure, homes are still in short supply in markets across the country. But there are other factors to consider as well, such as the record-breaking rise in home prices over the past two years. Add in higher mortgage rates, inflation, and other cost-of-living increases, and you have all the ingredients for a housing cooldown.

So perhaps we need a new definition of a buyer’s real estate market. Maybe we need to take the supply factor out of it, and define it solely in terms of negotiating leverage. This kind of market would occur when buyers start to have more negotiating power than sellers, due to a variety of factors.

And that’s something we could see in 2023.