2023 Housing Market: Will it Crash or Soar?

If you’re looking to buy or sell a home in 2023, you may be wondering what will happen to the market this year. In 2020, the Federal Reserve lowered interest rates by a considerable amount, which caused potential buyers to flood the market. At the same time, there were also less homes on the market for buyers to make offers on. High demand and low inventory equals a thriving market that drives home values up rapidly.

Towards the beginning of 2022, buyer demand began to slow as interest rate increases occurred. Home sales have since declined for 12 straight months. It’s possible that home values have reached their peak. However, there won’t be a clear picture until the busier summer months arrive.

Even though demand is dropping and prices are starting to level off, corrections in the housing market are likely going to be modest ones that don’t lead to a new housing crash. There’s no indication that home values will drop as they did during the Great Recession that occurred in 2008. The 2023 housing market is notable for high interest rates and somewhat balanced prices.

Regardless of your position in the real estate market, understanding the current state of the market is highly recommended. If you’re buying a new home, this information will fully prepare you for knowing what interest rates you’ll need to pay and if now is a good time to buy. When selling a home, understanding the current health of the market should help you list your property at a price you know buyers will find appealing. The following guide explores the 2023 housing market and how it should perform in the months to come.

Is a Crash Looming?

The U.S. housing market last crashed in 2008. In the few years before the Great Recession, the real estate market was highly turbulent and was somewhat similar to the state of the housing market following the onset of the COVID-19 pandemic. Once home values crashed in 2008 and the real estate bubble burst, the economy around the world took a stark downturn.

Housing market crashes tend to occur after the market is in a real estate bubble. However, not all real estate bubbles result in the market crashing. A housing bubble is a temporary period of time that’s characterized by low supply, high demand, and highly inflated prices that are far above the fundamentals.

Bubbles can be brought about by such factors as easy access to credit, ample mortgage product offerings, low interest rates, and increasing economic prosperity. It’s possible for a housing bubble to pop because of a decline in the economy, a drop in overall demand, and an increase in interest rates. All of these factors are currently present.

The pandemic brought about many of the market conditions that caused a housing bubble to form. In fact, demand increased so rapidly throughout 2020-2021 that sellers often received numerous bids in a short period of time, which routinely sparked bidding wars. It was common for sellers to receive offers that were much higher than the listing price.

Even though these market conditions are great for sellers, they occurred primarily because interest rates were artificially low. The Federal Reserve only lowered interest rates by a large amount to combat the economic issues that occurred when businesses had to temporarily shut down in 2020.

These reductions were always meant to be temporary. Once the Federal Reserve started to increase rates, buyer demand naturally fell off and the bubble came closer to popping. When interest rates are high, it costs more to obtain a loan. Lower demand also results in home values dropping. In 2008, the market became flooded with homes.

While all of these issues have the potential to lead to a housing market crash, there are counterarguments to the possibility of a crash that you should be aware of. Even though nearly every housing economist agrees that prices will fall in 2023, the decline shouldn’t be as severe as the one that occurred throughout the Great Recession.

Another difference is that the personal balance sheets of homeowners are much healthier now than they were in 2008. At that time, lenders had relatively lax lending requirements, which meant that borrowers could be approved for loans that they were barely able to afford. Any issues with finances could easily result in missed payments.

Today, lending requirements are much more stringent. The average homeowner has a fantastic credit score, a considerable amount of equity, and a mortgage that’s locked in at an interest rate that’s below 5%. In this scenario, foreclosures should remain relatively low for the foreseeable future.

Another reason that the Great Recession occurred was because of the high pace of construction of new homes, which caused more homes to be placed on the market at the same time that buyer demand was dropping and foreclosures were taking place. Builders remember this recession, which is why many of them have been cautious about the pace of construction they’ve maintained over the past few years.

While demand has dropped slightly, inventory is still exceedingly low and hasn’t come close to catching up with demand. Since inventory isn’t that high, there shouldn’t be another rapid decline of home values by 30% or more.

Where is the Housing Market Heading?

The trends of the past few months are good indicators of what will happen in the housing market throughout 2023 and in the coming years. The majority of markets will likely experience home value declines that reach the high single digits. While declines of around 7%-9% will cause some economic issues, this would be considered a small correction and shouldn’t create the same problems that occurred in the Great Recession.

Even though home values will drop, it’s important to understand that they are dropping from all-time highs, which means that selling a home in 2023 should still be a profitable endeavor. As for interest rates, the Federal Reserve has signaled that increases will still occur in 2023 but should slow down, which means that there’s a good chance that buyer demand will stabilize.

In the coming years, the primary factors that will affect the direction of the housing market include interest rates, amount of inventory, and job growth. It could takes years for inventory to catch up to demand, which means that home values shouldn’t drop too much.

As interest rates even out, more buyers may be interested in making offers. It’s possible that the real estate market will become more balanced over the next couple years since sellers and buyers have factors that are more favorable to them. While new government policies and interventions in the housing market are possible, the current policies mainly focus on promoting homeownership among potential buyers.

What is Affecting Fluctuations in the Housing Market?

As touched upon previously, there are several factors that affect the housing market, which include interest rates, inventory levels, and employment rates. Understanding how these factors have impacted the market in the past can help predict how they will affect the market in 2023.

When housing inventory is low, home values are almost always at least relatively high. Even if buyer demand is also relatively low, a lack of homes on the market means that potential buyers may need to make competing bids to purchase their dream home, which pushes the price up.

In January, it was stated by the National Association of Realtors that the market had a 2.9-month supply of homes available. A balanced market usually has around five to six months of supply, which means that demand is still considerably higher than inventory.

When the housing market crashed in 2008, the unemployment rate skyrocketed before peaking at 10% in October 2009. At this time, home values were at their lowest, which indicates that the real estate market is somewhat correlated with the job market. Today, the unemployment rate is at a very low 3.4%. If homeowners are able to keep their jobs, it’s less likely that foreclosure rates will increase, which should allow the broader market to remain relatively healthy.

As mentioned previously, interest rates shouldn’t increase too much in 2023. If interest rates were to increase substantially this year like they did in 2022, it’s possible that buyer demand would drop rapidly, which could lead to a recession. However, interest rates don’t often see large increases even when the economy isn’t at its healthiest.

Conclusion

While economists are uncertain of how the markets will react throughout 2023, it’s likely that the real estate market will remain healthy. Even though you shouldn’t expect the market to soar as it did following the COVID-19 pandemic, there’s also very little reason to believe that the market is heading towards a crash. Interest rate increases are slowing down, while home values are leveling out.

If you’re getting ready to enter the market and start searching for a new home, you shouldn’t encounter as much competition as buyers did in 2021 and parts of 2022. As a seller, the slight drop in buyer demand means that you should have a renewed focus on making your property appealing to buyers, which means setting a competitive price and properly marketing your home with a great listing.