Will Home Prices Drop in 2023?
"Be the things you loved most about the people who are gone." – Unknown
If you’re expecting a crash to make housing affordable, think again.
After years of soaring prices, home buyers are finally getting some relief. Since peaking at $413,800 last summer, national median home sale prices have been drifting lower.
As of January, prices were down 13% from that June high, according to the National Association of Realtors. Context, however, is key. Prices are still up a whopping 42% compared with prepandemic days, and many of the conditions that spurred that upswing—an extreme shortage of for-sale listings and soaring demand from millennials, to name a few—are still present.
So, if you’re expecting a crash to make housing affordable again, you may be waiting a while.
“The only way that we get to a significant drop or crash is if inflation somehow continues to run away and the Federal Reserve pushes interest rates through the roof full throttle,” says Jerimiah Taylor, who heads mortgage and real estate efforts at homeownership platform OJO. “If we saw interest rates in the teens, that would put a lot of downward pressure on home prices.”
What’s in store if rates don’t reach those extremes, though? Here’s a look at where home prices are likely headed this year.
Will Home Prices Drop in 2023?
While experts aren’t predicting an all-out crash at this point, opinions differ on what will happen next.
Some forecasts have home prices falling further. The University of California San Diego, for example, predicts prices will drop 5% nationally and as much as 18% in some cities. According to real-estate data provider CoreLogic, on the other hand, national prices will head the other direction—notching a 3% jump by the end of December.
In reality, either of these scenarios would be good news for home buyers—at least relative to the past few years.
Though prices had been rising steadily for over a decade, growth really picked up during the early pandemic, when pent-up quarantiners started looking for more space and mortgage rates bottomed at a mere 2.65%. This sent demand surging, and the median home price climbed from $274,500 at the end of 2019 to that whopping $413,000-plus by mid-2022.
“Looking at the price appreciation charts going back 20 years, you see this mountain that we climbed starting in the beginning of 2020,” says Rick Arvielo, co-founder of mortgage lender New American Funding. “It really started to spike, and that was largely driven by a lack of supply with a significant demand.”
“Lack of supply” is putting it lightly. Home builders have been gun-shy since the 2008 housing crash. As a result, the U.S. housing market has been short on for-sale listings for more than a decade. According to estimates, the market is still between 1 million and 4 million housing units short of demand.
This lack of supply is particularly challenging as the millennial generation—72-million-strong—now sits at prime home buying age. Though rising mortgage interest rates, which topped out at 7.08% in November—have eaten into demand somewhat, it’s still not enough to make a significant dent given the severity of the supply shortage.
“In order for prices to come down even more, we need more inventory,” Taylor says.
Instead, what most experts predict is a more stable market—one with less soaring highs and bottomed-out lows than we’ve seen in recent history. Or, as Arvielo puts it, “a reduction to reasonability.”
“I feel like we have much more opportunity for house prices to stabilize,” he says.
How to Tell if You’re Getting a Good Price on a Home
Home values tend to rise over time, which is good news once you’ve bought a place. And while there is no way to know whether home prices will rise or fall in the short term, there are ways to ensure you’re not overpaying.
Primarily, you can look at comparable sales—often called “comps” by real- estate agents—which detail recent transactions on similar properties in the area. These can give you an idea of whether the asking price for a home is in line with local trends.
Keep in mind, however, that it takes an average of 50 days to get from offer to closing, so comps can be dated in a fast-moving market. You can also look to other for-sale listings for a more up-to-date pulse on pricing; just remember that just because a home seller asks for a price doesn’t mean they are going to get it.
“Look at what else is on the market and compare what you could have bought for the same amount,” Taylor says. “This is the easiest way to find out if you got a good price on your home in comparison to what else is on the market.
Finally, understand your finances. Know what you can afford to spend on housing each month. If a home you’re eyeing is outside your budget, consider the lifestyle changes you would have to make for those numbers to work and whether they are worthwhile.
As Maureen McDermut, a real-estate agent with Sotheby’s International in Santa Barbara, Calif., explains, “A good price on a home should be something that allows you to live your life—and not simply work to pay it off.”
