6 predictions from Redfin for 2023

December 6, 2022 11:21 PM

The headwinds that plagued the mortgage industry in a turbulent 2022 look as if they'll persist through the next 12 months, experts at Redfin predict.

In its annual housing outlook, the real estate brokerage sees affordability concerns, interest rates and falling sales volumes remaining predominant concerns next year. Despite some recent lower prices and interest rates, the climb out of the 2022 trough will be a drawn-out effort. However, the second half of 2023 should bring improved conditions for housing.

Here are a few of the technology brokerage's expectations for the coming year:

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Home values will post a 4% yearly decline for the first time in over a decade

The U.S. median home price will end 2023 lower on an annual basis for the first time since 2012, settling at $368,000, a 4% drop. Several reports of prices edging downward from month to month started to appear in the latter half of 2022, and conditions are still in place for further softening lingering into the new year.

Although prices are currently still up from last year, they will begin posting negative growth in the first quarter, accelerating to a 5% pullback midyear before rising again, Redfin said. But a fourth-quarter turnaround won't be enough to lift the median above the 2022 level.

Redfin joins Fannie Mae in predicting that home prices will end up below 2022 numbers, while economists at CoreLogic expect a first-half decline to turn around sufficiently toward the end of the year to post an annual increase.

Falling home prices won't turn into a large wave of foreclosures, though, due to the high degree that values surged between mid 2020 to early 2022. Despite the loss in value, most borrowers are likely sitting on low interest rates and own homes with a substantial amount of accrued equity if purchased before the start of the coronavirus pandemic. Factors like higher interest rates and inventory shortages that helped limit affordability and push up prices to begin with, also have not subsided to a level leading to a foreclosure crisis.

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Interest rates will drop below 6%

The benchmark 30-year interest rate, which crossed the 7% threshold in October but has steadily fallen since, will likely end next year at 5.8%. The full-year average will come in at 6.1%. The most recent weekly average of the 30-year rate according to Freddie Mac was 6.49%.

Hikes of the federal funds rate will continue into next year, and the desired effect of slowing inflation will likely occur. Mortgage rates are likely to retreat further as a result. Should inflation fall quicker than anticipated, the pace and margin of rate drops are likely to increase.

A reduction in mortgage rates from 6.5% to 5.8% might save a buyer of a $400,000 home about $150 a month, but still won't resolve ongoing affordability concerns.

Many may remember, though, that few were expecting mortgage rates to pass 6%, much less 7%, when predictions were made in 2022.

Home sales will fall to lowest point since 2011

Even with the drop in both rates and prices, affordability and inventory issues will remain, helping drive home sales down to a more than 10-year low.

"When buyers don't want to buy, sellers don't want to sell," the company's report said, adding that people will only move if they need to. Diminished demand, compounded by homeowners with low mortgage rates staying in place, will suppress new listings. Inflation and a potential recession also continue to weigh on buyer interest.

The sluggish pace of closings has Redfin forecasting existing-home sales to drop 16% in 2023 to 4.3 million, starting the year with a 31% first-quarter plunge before improvement to flat year-over-year sales volumes in the final few months.

For newly built homes, the decrease will be even steeper at 20%, landing at approximately 500,000 units sold nationwide.

Builders will turn toward multifamily construction

With no expectations for sales of new single-family homes to improve, builders will focus more on the construction of apartment and multifamily dwellings. An excess of new-home inventory has already led some builders to cut asking prices, making them less likely to increase their current supply. "They'll pull back dramatically in some markets like Phoenix and Dallas, where they built too many homes in anticipation of demand that's failing to materialize," Redfin said.

While rental constructions will also see some falloff, the volume is likely less dramatic, making more financial sense to pivot toward multifamily building.

Redfin predicts an annual 25% decline in overall building permits and housing starts in 2023.

Investor purchases will also be on the wane

Real estate investment purchases will similarly fall, with Redfin anticipating 25% fewer home purchases compared to 2022. With a business model based on buying low, before selling high or renting out a unit, investors feel a sizable impact with any spike in interest rates, and when combined with reduced credit availability, borrowing opportunities become harder to find.

Reduced competition from iBuyers will also slow purchase activity, as well as a fewer number of entrepreneurs entering investor real estate. The market is likely to hit bottom in the spring before purchase volumes start to return.

Midwest, Northeast property values will hold up best

While these regions may not have profited to the same degree as other parts of the country during the mortgage boom, Midwest and East Coast housing markets that have a larger supply of affordable homes are more likely to hold their value next year. Redfin singled out the Chicago area, upstate New York and parts of Connecticut as areas where prices should be stable.

On the other end, markets in the West considered hot in 2020 and 2021, such as Austin, Phoenix and Boise, should prepare to see prices fall off, mostly due to the elevated pace of growth in a short period of time.