Market predictions for 2023 — and how we got here

October 2022 marked the ninth straight month of decline for existing home sales, falling 5.9% from September 2022 and 28.4% from October 2021, according to the National Association of Realtors. 

Nationally, home prices grew — up 6.6% from a year ago — but home values in some markets, like Phoenix, are falling as much as $20,000, worrying some that we are in the midst of a housing market correction.

Mary Catherine Soulsby, an Orchard Home Advisor based in Atlanta, says the mood among buyers and sellers has changed drastically from just a year ago.

“Sellers are getting crabby about their actual list price, compared to what they feel it should be,” says Soulsby. “And when their home gets listed, and there isn’t an immediate offer — or multiple offers, like we saw months ago — that makes them even more upset. “

That’s to say nothing of mortgage rates, which topped 7% in October, a 20-year high. Soulsby has seen the effects firsthand: “Buyers are nervous because of interest rates. They don't have as much buying power as they did before, with interest being this high.”

With so many mixed signals from the housing market, homeowners and prospective buyers are wondering what’s in store for 2023. We spoke to our in-house industry experts to make sense of the market, predict where it’s headed, and compile a list of tips for navigating it.

Timeline: How did the housing market get here?

“Compared to this same time last year, it's like someone tapped the brakes,” says Tami Kirby, an Orchard Listing Agent in Dallas-Fort Worth. So how did we get here?

Early 2020: Market expected to do poorly

In the immediate fallout of the COVID-19 pandemic, the U.S. economy entered a brief recession lasting a total of two months. In the first month of the recession alone, close to 22 million people lost their jobs and many more struggled to make ends meet, including paying their mortgages.

All of this boded poorly for the housing market. Without jobs, people couldn’t afford to buy new homes and many feared that they would lose their current one. For those who were still able to buy or sell their home, there was the additional challenge of not knowing how to transact real estate — a traditionally in-person industry — in a COVID-safe manner.

2020-2022: Market defies expectations and booms

Relief in the form of economic stimulus arrived quickly, however. Foreclosures and mortgage delinquencies didn’t spike, as was feared, and the economy began to grow again. Remote work policies pushed people out of city centers into the suburbs, and mortgage rates dropped to all-time lows.

The real estate industry rapidly adopted tech-solutions to navigate remote home showings, appraisals, and closings in order to operate in a COVID-safe world. Suddenly, the outlook for the market was looking brighter than ever.

However, the housing market had been in a decade-long inventory shortage following the housing crash of 2008 to 2009. In the aftermath, builders pulled back on new construction fearing an inventory surplus, like the one which preceded the crash, despite sustained demand for homes.

This meant that as demand surged in early 2020, there still weren’t enough homes on the market for buyers. Record appreciation in home values and staggering competition resulted. Everyone was expecting the market to grow to the sky, but in reality there are laws of physics, and all of that eventually had to change.

April 2022: Market sputters with rising mortgage rates

And the markets have changed. Since April 2022, mortgage rates have spiked to their highest levels since 2002, forcing many hopeful homebuyers out of the market — including many current mortgage holders, 85% of whom have a mortgage rate under 5%.

All of this is by design, though. Jerome Powell, the Chair of the Federal Reserve, ranked cooling the housing market among his top priorities in the fight against inflation. In his September press conference, he said:

“For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level — at a reasonable pace — and that people can afford houses again. So we probably, in the housing market, have to go through a correction to get back to that place.”

Where is the market headed in 2023?

The wild and twisting journey of the housing market is far from over. 

“The confidence that a lot of people have had is shaken,” says Sean Roberts, Orchard’s Chief Operating and Financial Officer. “But for those that are bold enough to go out there and start shopping, there are actually some really interesting deals to be had.” 

Here’s an idea of what to expect:

Interest rates

The Federal Reserve has been raising interest rates — which indirectly influence mortgage rates — in order to curb inflation. The October inflation report showed promising signs that consumer price gains were slowing, offering some hope of the end of the Fed’s campaign. However, the Federal Reserve is committed to continuing to raise interest rates in the near term.

This means that mortgage interest rates will likely hold in the high 6% to mid 7% range through 2023. While these rates are higher than in the recent past, they are nearing the historical average of 7.76%.

Home prices

Fannie Mae and Freddie Mac forecast home prices to fall in 2023, at a rate of 1.5% and 0.2% respectively. As buyer demand stalls and homes sit on the market, sellers are expected to cut prices and make more seller concessions. For buyers who haven’t been able to get an edge in the housing market in the last two years, this could be their break.

But Roberts says not to expect this downward trend in home prices to last. In fact, he predicts prices to rebound once the market levels out because of continued constraints on housing inventory: “At some point when things normalize, we're still going to have an under-supplied housing market with more demand than supply, which will actually be a tailwind to home [prices] over probably the back-half of this decade.”

Recession fears

Many economists expect the U.S. to enter a recession in late 2023 or early 2024, while others say that a technical recession may be avoided, but a slowing job market will contribute to the feeling of one.

Fears of a recession alone may continue to temper demand in the housing market, as people delay buying a home until the economy normalizes. Conversely, recessions can trigger the lowering of interest rates, home prices, and competition, making it a good time to buy a house for those who have the financial ability to do so.

Why a housing crash isn’t likely

Though recession anxieties and a cooling market are stoking fears of a crash, experts remain confident that it’s not in the cards. Here are the main factors they’re using to make that assessment:

Better lending practices

One of the greatest drivers of the housing bubble that preceded the Great Recession were subprime loans. That meant that people were purchasing homes that they couldn’t afford, without knowing it.

Today’s lending practices operate under much stricter rules, including litigious underwriting practices which ensure greater accountability for lenders and more transparency for borrowers.

Low inventory

The U.S. remains in a housing inventory shortage, and even with reduced buyer demand today, there are no signs of shifting into a housing surplus. Low inventory helps maintain (or even increase) home values because of their scarcity — the fewer houses there are for sale, the more valuable the houses on the market become. A continued housing shortage will help guard against the possibility of another crash.

Pent up demand

Millions of homeowners who were priced out during the 2020-2022 boom remain eager to buy a home — they just need prices to normalize. Additionally, demographic trends are fueling a new generation of people looking to buy, primarily Millennials who are aging into peak homebuying age.

Low foreclosure rates

High foreclosure rates can flood the market with low-cost inventory and drive down home values. We saw this in the aftermath of the 2008 housing bubble, as banks tried to recoup their losses on foreclosed homes. However, as a result of stricter lending practices, foreclosure rates have remained low, preventing this imbalance.

Tips for navigating the market as a seller

While some may prefer to wait out the current market, there are still more than four million homes expected to sell in 2023 according to Fannie Mae’s forecast. If you’re one of the many people who will sell a home this year, here are some tips:

Focus on your local market

While the national housing market is an important indicator of economic health for the U.S., it’s not as relevant to your home sale as your local market. Keep tabs on median home prices, days on the market, and other trends in your neighborhood for the best indication of what to expect.

→ Use our dashboard for housing market prices and trends

Hedge expectations, but stay optimistic

The housing market isn’t as red-hot as it used to be.

Kirby tells sellers to be prepared to be on the market for at least 30 to 60 days, and cautions them against pricing their home above market value: “Even then, be prepared to take less than what you hoped it would sell for as long as it still makes financial sense for you.”

If you’re worried about selling your home, consider working with a power buyer like Orchard. We’ll invest in listing prep to help you sell for top-dollar — we’ll even guarantee your home sale if it doesn’t sell on the open market in 120 days.

Lean on your agent

Agents are more than just a resource for navigating the legal or financial side of a real estate transaction — they’re there to help you from start to finish. Perhaps, most valuably, they can offer insight to make sense of the market and put the current trends in perspective.

“Communication and analyzing market stats are more important than in prior years,” says Seattle Home Advisor Kari Gordon. And no one is better equipped to help with that than your real estate agent.

→ Learn more about whether you should sell your house in 2023 

Tips for navigating the market as a buyer

If you’re looking to buy in the next year, here’s some advice for navigating the changing landscape:

Focus on your finances

While news of decreased buying power may leave you feeling like there’s no chance of owning a new home, the most important indicator of affordability are your individual finances. Take a close look at your savings, debts, and credit score, and use a mortgage calculator to estimate your monthly payments.

Shop around for different lenders

Val Gaytan, a Success Associate at Orchard, says that she advises buyers to explore at least three to four different lenders and negotiate. Even if your lender can’t offer you a lower interest rate, they may be able to reduce their origination fee or offer other perks.

When you buy with Orchard and use Orchard Mortgage, you’ll get no-fee refinancing for life. So when interest rates drop, you can refinance your mortgage into a lower rate, without paying traditional service fees charged by other lenders.

Don’t wait if you don’t have to

Interest rates are still expected to rise, so locking in the current rates — even if they’re higher than you’d like — could be your opportunity to maximize your buying power. Plus, you may be able to use a rate buydown to lower your interest rate to a more comfortable amount.

“We can’t predict the future,” Gordon says. “If you’re ready to move, let’s get started now.”

Want more insight into navigating the market? Read more in depth about whether now is a good time to buy a house.