What to Expect When Buying a House in 2023

Quick Answer

Expect the housing market in 2023 to look different from the highly competitive housing market of the past two years. Some predictions include a gradual drop in home prices, high interest rates and a switch to a buyer’s market.

Woman real estate consultant meeting with client to discuss state of housing market.

Buying a home is a significant financial commitment, regardless of the market conditions. But after a record-setting rise in home prices in 2021 and 2022, and mortgage interest rates rising to the highest mark in two decades, there are a few things for prospective homebuyers to keep in mind for 2023.

While the housing market can vary significantly based on location, it can be helpful to know about general expectations to consider as you prepare to hunt for a home.

Mortgage Rates May Stall or Continue to Rise

As of October 27, 2022, the average interest rate for a 30-year fixed-rate mortgage was 7.08%, according to Freddie Mac, the highest it's been since 2002. Mortgage rates are driven by a number of factors, including inflation.

In 2022, the inflation rate has reached levels the country hasn't seen since the early 1980s, and it's uncertain where rates will go in 2023. But other factors, such as the Federal Reserve's monetary policy and housing market conditions, also have an impact on home loan rates.

As a result, it's difficult to say exactly how mortgage rates will behave. According to Fannie Mae's October 2022 housing forecast, the government-sponsored enterprise expects mortgage rates to fall slightly to 6.6% by the first quarter of 2023 and continue a steady decline to 6.2% in the fourth quarter. Other analysts predict higher rates. To limit your exposure to increasing interest rates, consider locking in a rate quickly and possibly even paying a fee for a longer rate lock period, if necessary.

Your best bet for securing a low interest rate, though, is to shop around for a loan, improve your credit, lower your debt-to-income ratio and make a large down payment. You can also consider an adjustable-rate mortgage (ARM), but understand the differences between adjustable-rate and fixed-rate loans before you apply.

Home Prices Will Likely Drop

As interest rates have risen throughout 2022, home sales have seen a sharp decline. Fannie Mae has forecasted that total home sales will reach 5.64 million in 2022, an 18.1% drop from 2021; in 2023, that figure is expected to decline again to 4.47 million, a 20.7% decrease from this year.

As a result, Fannie Mae expects home prices to fall, but only by 1.5% nationwide. Other analysts expect a more dramatic drop, with Goldman Sachs suggesting that home prices may decline by 5% to 10% in the coming year.

Of course, housing price movements can vary greatly by location, so it's important to speak with real estate experts in your area to get an idea of what to expect.

While home prices are an important factor for homebuyers to consider, it's also crucial that you consider how interest rates can impact your monthly payment. If you wait too long, hoping that prices will go down and interest rates will continue to increase, buying a home could become unaffordable.

Supply May Remain Low

For the past couple of years, buyer demand has exceeded the supply of homes, resulting in price increases at a blistering rate. Wells Fargo economists don't expect supply to grow by much in 2023.

That's because 85% of homeowners in the U.S. currently have an interest rate under 5%, according to a Redfin analysis, many of whom likely took advantage of the refinance boom in 2021. With interest rates going up and little certainty about where they'll land next year, homeowners don't have much of a financial incentive to sell.

Additionally, homebuilder confidence hit its lowest level since 2012 in October, according to the National Association of Home Builders, and the organization expects new construction to continue to decline in 2023.

If you currently own a home, have a relatively low interest rate and don't have a pressing need to sell, it may be worthwhile to remain where you are until conditions begin to lean more in the sellers' favor. While it's uncertain how long the current interest rate environment will last, you could save money by staying put.

Demand May Remain Strong, But Cracks Are Starting to Form

Wells Fargo's economists expect that buyer demand will remain strong in 2023, but note that it's largely driven by younger homebuyers who are more sensitive to interest rate increases and more susceptible to job loss during recessions.

However, more than half of the economists and housing experts polled in a recent Zillow Home Price Expectations Survey expect that high mortgage rates will impact demand enough to reduce competition between homebuyers in 2023, giving buyers more leverage than sellers.

If you experience a buyer's market, work with an experienced real estate agent to negotiate the sales price and concessions to maximize your savings.

Consult With a Professional for Your Local Market

Predictions for the 2023 housing market are just that, and while economists and analysts tend to focus more on nationwide trends, local real estate agents and other professionals have a finger on the pulse of current trends in your area.

As a result, if you're thinking about moving in the coming year, don't hesitate to reach out to experts where you live or plan to move. They can help you get a better idea of what to expect and how to maximize your savings on a new home.

Now is also a good time to start preparing your credit history for a home purchase. Review your credit score and credit report to evaluate your credit health and, if necessary, take steps to improve your credit before you start the mortgage process.

This process can take time, though, so keep an eye on mortgage rates to find a good balance between the variables you can control and the ones you can't.