The Outlook of the US real estate/housing market in 2023

For homeowners, a decrease in value is not only a decrease in their net worth but could also put their mortgage in jeopardy if the value of their property goes below the balance of their mortgage.

Potential USA house buyers might be excited about the prospect of a housing market correction because this would make houses more affordable for them and could allow them to get into the market.

And investors and economic commentators watch what the housing market does because the behavior of the housing market has a significant impact on other asset classes as well.

Throughout this article, we consider some of the potential indicators and things we can keep an eye on, which may give us an early indication of what the housing market is going to do in 2023.

Interest Rates

The thing that will have the biggest impact on the housing market in 2023 is interest rates. Economic commentators have been watching very closely as interest rates have increased throughout 2022 and there is no guarantee that they will not be increased further in 2023.

Why do interest rates impact the housing market?

Interest rates have an impact on the housing market because as interest rates go up, it becomes more expensive to get a mortgage for a house. After all, the ongoing repayments are going to be higher. As the payments increase, this decreases the borrowing power of a potential borrower (meaning they will have less money to spend on a house).

Interest rates are regularly manipulated by central banks on purpose as a way to influence overall economic conditions. If the Federal Reserve believes that inflation in the economy is too high, meaning that prices are going up too quickly, then they look to increase interest rates with the hope that this decreases the amount of money people have that they can spend on luxury items and reduce their spending, which should reduce inflation and avoid any negative long-term consequences.

Likewise, when the economy is sluggish and slow and they are wanting people to be spending more money, then they tend to lower the interest rates, which makes credit a lot more affordable and gives people more money to spend, which stimulates the economy and helps with employment levels.

However, aside from interest rates, there are some other things that influence the housing market.

Supply And Demand

Aside from the cost of finance, the supply of available houses is another influential factor in the way the housing market will perform in 2023. The fundamental principle underlying the law of supply and demand is that in cases where many people are pursuing a small number of goods, the demand is high and as a result, people will outbid each other and pay a higher price for those goods. In the case of housing, if there is a small number of available houses, but many people that want to buy a house, then this will drive up the price of those available houses.

Conversely, if there are many houses available and a small number of people are looking to buy, then this will decrease prices because the supply is greater than the demand. In this case, there will be many options that people can choose from and they will not necessarily be competing with other buyers. So the people selling their house will not have as much bargaining power to raise the price.

Supply and demand dynamics around America are different in different locations. A big impact on the nature of supply and demand in any location is population and government policy regarding new development.

Given population is relatively stable, this will not have a significant impact, but government policies regarding new development will have a significant impact on the housing market in 2023.

If policies are friendly to further development and encourage development by unlocking land for development and enabling residents to subdivide their farms and larger housing blocks, then this is a good thing for the housing supply that will make housing more affordable.

But if policies are constructive regarding housing supply, then you will find more people looking at a small number of houses, which will drive the prices of those houses up.

Other things that can impact supply and demand are taxation policies. Taxation policy can influence the supply and demand of the housing market by changing how beneficial it is for investors to hold real estate.

Suppose there are generous incentives and tax breaks that come along with purchasing, renovating, and holding real estate. In that case, this will bring more investors into the real estate market, buying more properties, which will then decrease the supply and drive up the prices.

Global Confidence

Unrelated to interest rates and supply and demand is the issue of global economic confidence. 

When there are global uncertainties in terms of wars and conflicts between different countries, this can decrease people’s interest in purchasing a House because it creates uncertainty about the future.

Given the current war that is raging in Europe, this could have an impact on investor confidence and decrease the number of people that are wanting to purchase a home. This change in investor confidence will then play into the supply and demand equation and potentially decrease demand, which will lower prices.

Health

The recent global pandemic has had a significant impact on the health of millions of individuals. Someone’s health and the impact of their health on their potential economic future can also impact the housing market. If a lot of people get very sick and are not confident that they will be able to work for a long period – this could decrease their likelihood of wanting to purchase a house which will then play into the supply and demand equation again.

Looking Into The Crystal Ball

It is very difficult to make accurate predictions regarding the future of the housing market. From looking at the charts of average housing prices, it does look as though prices are currently in a downward trend. 

During the COVID pandemic, there was an increase in house-buying activity but as the pandemic has settled and there has been a moderate downturn in the housing market. 

As much as the principles that we have discussed in this article are quite consistent and do influence the market, there is always the possibility that something unexpected has a significant impact that we could not have predicted. 

At a high level, if we had to predict the housing market for 2023, there is a strong likelihood that interest rates will increase and that global conflict will continue which would suggest that the housing market would continue its current downturn. 

This is not to suggest that it is due for a significant crash although we cannot rule that out, just that we would expect a small decline in the housing market to continue or at best for the market to stay stable.