BAM’s Key Details:
- Redfin’s 2023 Housing Market Forecast features 12 predictions on key housing metrics
- Redfin economists expect a post-pandemic sales slump that will drive home prices down for the first time in 10 years
- While high mortgage rates will continue to dampen home sales, high homeowner equity and a strong job market will prevent a flood of foreclosures
Redfin’s 2023 Housing Market Forecast makes 12 predictions on key housing metrics to paint a picture for the upcoming year.
Each prediction starts with the most likely scenario, which is what we’ll focus on here. You can also read the full forecast for alternate scenarios based on the outcome of the Fed’s efforts to bring inflation under control.
Redfin’s 12 Predictions for 2023
#1: Home sales will drop to their lowest level since 2011
First up, Redfin’s economists expect home sales will continue to fall, dropping to a level not seen since 2011. Compared to 2022, they’re expecting about 16% fewer existing home sales for 2023, with buyers and sellers both holding off mainly due to affordability challenges.
The year-over-year drop will be most obvious in the first quarter at around 31%, with smaller annual drops in Q2 and Q3. By Q4, existing home sales will be more or less flat from the year before.
#2: Mortgage rates will decline, ending the year below 6%
Taking center stage in 2023, mortgage rates will continue their downward trend, sinking below 6% by the end of the year. That’s if Redfin’s most confident prediction pans out. In the meantime, rates well above 6% will make 2023’s housing market the slowest since 2011.
That said, as more of today’s sidelined buyers reenter the market with more buying power, sellers are also likely to jump back in, driving up new listings.
#3: Home prices will post their first year-over-year decline in 10 years, but the U.S. will avoid a flood of foreclosures
The expected drop in home sales will drive prices down by about 4%, marking the first decline in a decade. But high homeowner equity and a robust job market will make a wave of foreclosures unlikely.
At present, about 8% of mortgages that originated in 2022 are at least marginally underwater, but the number of foreclosures is still near a record low.
Source: Keeping Current Matters
#4: Rents will fall, and many will continue renting indefinitely
Redfin expects U.S. asking rents to show a modest year-over-year decline by mid-2023, with rents falling more quickly in some metros. Renters can even look forward to some concessions by some of the larger landlords—like a free month’s rent or free parking—before rents go down.
With multifamily construction at a 50-year high, Redfin expects hundreds of thousands of new rental units to come available next year, driving supply up and prices down while the cost of buying a home remains too high for many.
Also, many homeowners will choose to rent out their homes rather than sell to bring in extra income and avoid losing their low mortgage rate.
#5: Midwest and Northeast markets will hold up best
On the other end of the affordability spectrum, Redfin expects to see more pronounced price drops in pandemic migration favorites like Austin, Boise, and Phoenix. Expensive West Coast cities like San Francisco and Los Angeles will also see larger price drops thanks to slumping tech stocks and the continuing shift to remote work.
#6: Builders will focus more on multifamily rentals
Builders will continue to pull back on new home construction—especially single-family homes. Construction of these homes surged during the pandemic, and builders are now having to make buyer concessions to offload the properties they have before building new ones.
With demand for rentals still relatively strong, building more multi-family houses and apartment buildings will make more financial sense for builders in 2023.
#7: Investor activity will hit bottom in the spring and then rebound
Compared to 2022, real estate investors will buy about 25% fewer homes in 2023, with purchases likely to hit their lowest point in the spring, thanks to the higher cost of borrowing money to buy homes. Another factor is fewer iBuyers in the market. Some investors will slow their buying activity, while others (mostly the newer and smaller investors) will leave the market completely.
If inflation slows as forecasted and the Fed eases up on their rate hikes, investors will likely start buying again in the second half of 2023 to take advantage of the slightly lower housing prices and mortgage rates.
#8: Gen Zers will look for jobs and apartments in relatively affordable mid-tier metros
As Gen Zers enter the workforce, they have more remote-work opportunities than older generations, which gives them the flexibility to prioritize things like affordability, proximity to family, lifestyle, and weather. Redfin economists expect more of them to take advantage.
#9: Migration from one part of the country to another will ease up
While migration from one area of the country to another will probably remain above pre-pandemic levels, Redfin expects the share of Americans relocating for one reason or another to drop from this year’s 24% to about 20%.
#10: Rising disaster-insurance costs will make high-climate-risk homes even more expensive
If the cost of living in a high-climate-risk area like coastal Florida or the wildfire-prone forests of California weren’t high enough, the rising cost of flood and fire insurance for these and other climate-risky areas has made them even more expensive.
With the increasing frequency of fires, floods, and devastating storms, some insurance companies have stopped even providing coverage for areas with higher-than-average climate risk, while elsewhere, rates have skyrocketed, driving up the cost of living in those areas.
#11: More metros will follow Minneapolis’ YIMBY example to rein in housing costs
In 2019, Minneapolis became the first major U.S. city to eliminate single-family-only zoning for its YIMBY (“YES in my backyard”) initiative, which is at least part of the reason this city was the first to see rents decline. Now, other cities are following its example to curb housing costs.
#12: Buyers’ agent commissions will see a slight increase
The pandemic homebuying frenzy drove the typical buyers’ agent commissions down to 2.63% of the home sale price. But as fewer buyer agents broker fewer deals at lower prices, buyers’ agent commissions will see a modest uptick to compensate.
Sellers will likely play a part in this, too, by offering a higher commission to attract buyers.
The decline in agent commissions is likely to resume once the market heats up again. That’s because the real estate industry is finding new ways to educate consumers on how agents are paid, including a requirement that commissions are publicly displayed. Additionally, the industry is under scrutiny as the Department of Justice looks into how agents are paid and considers whether the commission structure causes limited competition. That probe could result in buyers becoming responsible for paying their own agents, which would likely lead to a drop in commissions.
Top takeaways for real estate agents
Take stock of what data scientists in the housing industry are saying about what you and your clients can expect in the coming year, so you can answer their questions quickly and confidently.
Make it a priority to keep developing your knowledge and understanding of the housing market and how it works so you can see through the confusing headlines and help your clients make sense of what matters most.