Homebuyers Are Hoping for a 2023 Market Crash: What Will Really Happen?

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Until recently, the housing market had been heating up at a rapid pace — leading many buyers to find themselves priced out, especially first-timers. If you weren’t able to make a cash offer, offer a large amount over the list price, or waive inspections, you might have grown frustrated. In fact, according to a recent HomeLight survey, many buyers are hoping for a housing market crash in 2023. But will it happen?

After weathering the crash of 2008 and 2009, top real estate agent Kris Shook of Tacoma, Washington, shares his opinion: “We haven’t seen a traditional seasonal market in a long time. Now, we’re just dealing with a traditional, normal seasonal market,” and not a crash.

If it’s a more normal market, will you be able to finally find an affordable home? Will rising inflation and interest rates lead to a buyer’s market? Let’s cut through the theories and speculation and look more closely at the actual numbers.

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Will the housing market crash in 2023?

HomeLight recently surveyed over a thousand top real estate agents nationwide to get their read on the upcoming year’s market. To get a sense of the frustration many aspiring buyers are feeling, we asked agents if they’ve heard clients express “hope” for a market crash. The results of the HomeLight New Year 2023 Top Agent Insights Survey show that over 70% of agents reported clients expressing this sentiment.

While homebuyers may not seriously wish the U.S. housing market and broader economy ill (a crash would entail a drop in home values of 20%-30%) it does indicate just how challenging things have become and the sense of desperation that has grown as affordability roadblocks pile up. Buyers have been looking at inflation, fears of a recession, and rising interest rates, and crossing their fingers for a crash.

But the answer to: “Will the housing market crash in 2023?” is probably no.

That doesn’t mean there won’t be good news for buyers, though. It’s more likely that we’ll have a correction of smaller proportions. HomeLight’s survey found that 45% of top agents are predicting a balanced market in their area in 2023.

Why? The fundamentals of a true crash aren’t present.

What causes housing market crashes?

There are a few macroeconomic factors that led to past housing marketing crashes.

Spikes in unemployment

Dramatic increases in unemployment can lead to foreclosures, particularly if people don’t have much equity in their homes. Studies have found a clear correlation between housing market downturns and unemployment, particularly in areas with strong industry and employer concentrations. By 2010, during and after the last housing market crash, unemployment had risen to 9.6%. The current unemployment rate sits at 3.7%, and while it’s projected to grow to 4.3% by the end of 2023, that isn’t high enough to contribute to a housing crash.

Lower demand for housing

Lowered demand is another factor that leads to downturns in the housing market. This can be due to unemployment, rising home values that price buyers out of the market, or generational shifts. The housing market goes in cycles as generations need housing for families, or downsize for retirement.

Mortgage and foreclosure concerns

An economic downturn can cause mortgage affordability issues — leading to foreclosures. Whether it’s a recession or inflation, neither is good for the housing market.

During inflationary periods, prices are rising and wages can’t keep up. The Federal Reserve typically raises interest rates, increasing the cost of borrowing, to curb demand and dampen inflation. But when interest rates are higher, buyers are reluctant to take out a mortgage and pay more for their loan. The Federal Reserve did raise interest rates in 2022, and might raise them again, but interest rates are still at historical lows.

Mortgage rate trends 1974-2021

Year Average 30-year rate Year Average 30-year rate Year Average 30-year rate Year Average 30-year rate
1974 9.19% 1986 10.19% 1998 6.94% 2010 4.69%
1975 9.05% 1987 10.21% 1999 7.44% 2011 4.45%
1976 8.87% 1988 10.34% 2000 8.05% 2012 3.66%
1977 8.85% 1989 10.32% 2001 6.97% 2013 3.98%
1978 9.64% 1990 10.13% 2002 6.54% 2014 4.17%
1979 11.20% 1991 9.25% 2003 5.83% 2015 3.85%
1980 13.74% 1992 8.39% 2004 5.84% 2016 3.65%
1981 16.63% 1993 7.31% 2005 5.87% 2017 3.99%
1982 16.04% 1994 8.38% 2006 6.41% 2018 4.54%
1983 13.24% 1995 7.93% 2007 6.34% 2019 3.94%
1984 13.88% 1996 7.81% 2008 6.03% 2020 3.10%
1985 12.43% 1997 7.60% 2009 5.04% 2021 2.96%

Source: Freddie Mac

2022 average 30-year mortgage rates

January February March April May June
3.45% 3.76% 4.17% 4.98% 5.23% 5.52%
July August September October November December
5.41% 5.22% 6.11% 6.90% 6.58% 6.33%

Source: Freddie Mac (Pending final November and December averages.)

Consumer fears and behaviors

If the country is in a recession, a slowdown in economic activity can lead to job cuts. When people are worried about their jobs, they’re not likely to buy a new house.

Based on one definition of a recession — two consecutive quarters of falling gross domestic product (GDP) — some economists and market professionals believe we entered a recession in the summer of 2022. However, since GDP grew in the third quarter and is expected to grow more in the fourth quarter of 2022, don’t count on a contraction that could lead to lower housing prices. But prices still could go down, which we’ll address in a moment.

During 2008 and 2009, Shook says that “what caused our issues was related to just how loose guidelines were and how shady a lot of individuals were with stated loans.” He points out that homeowners were taking out equity loans to go on vacations, or buy a boat, and lenders were approving 100% loan-to-value loans. Without any equity left in their homes, and without the income needed to support the mortgage, homeowners went into default.

While there are some economic indicators that could cool the housing market, they’re unlikely to cause a complete crash. But that doesn’t mean that buyers won’t be completely out of luck in 2023.

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Some good news for homebuyers in 2023

Even if the housing market won’t crash in 2023, buyers still have a lot to give them hope.

Fewer buyers, lower prices

“Appreciation plateauing or dipping will be the good news,” says Shook. With higher interest rates dampening demand, there will be fewer buyers in the market to drive up prices. Lower demand typically equals lower prices. U.S. home prices dropped for the third straight month in a row in November, and are predicted to decrease 8%-10% by August 2023. Some research and investment firms are predicting housing prices could fall as much as 20%.

More homes to choose from

Low inventory contributed to the past few years’ hot market. Predictions for 2023 vary, with some saying inventory will be flat, and others predicting that higher interest rates will lead to an inventory build-up before the Federal Reserve lowers rates. Inventory can also depend on what’s happening in local markets, so you might want to talk to an experienced agent with local insight. But over 50% of agents surveyed say that inventory is rising in their area — which is good news for homebuyers.

A more balanced, stable market

Higher inventory and home prices that aren’t shooting through the roof make it likely you’ll find a more balanced market in 2023. Shook says that a year ago, they’d list as a floor value, i.e., the minimum the seller would take, and expect to get above the list price. Today, he says the list price in his market is the ceiling and sellers don’t expect multiple offers significantly over list price.

Fewer bidding wars

Bidding wars have cooled, too. In our insights survey, a whopping 83.14% of agents said that bidding wars are on the decline in their market. Even if a house receives multiple offers, it’s not quite the frenzy it was two years ago.

Less competition from cash offers

Buyers who could make cash offers also presented challenges to buyers without deep pockets. Sellers often favored a cash offer because it could close quickly and there was no worry about the home appraising for a mortgage. But according to 40.55% of agents, cash offers are flat, and 37.23% say they’re on the decline.

Reduced contingency risk

If you’re a first-time homebuyer, waiving contingencies might have understandably made you nervous. Agreeing to forego a home inspection, or the home appraisal contingency, can be scary, but many buyers were waiving contingencies to win a house against multiple offers. The good news is that contingencies are coming back — 76.61% of agents say that buyers are less likely to waive them now.

In short? All signs point to a more normal buying experience and a market that’s shifting the power balance to buyers.

I can’t guarantee it, but the government knows that raising interest rates is affecting and hurting the housing market, but helping curb inflation so we don’t go into a major recession. But they can’t keep interest rates this high for that long as many people are missing out on the dream of home ownership.

Buying a house in 2023?

According to Shook, interest rates can’t stay high forever. As he puts it, “I can’t guarantee it, but the government knows that raising interest rates is affecting and hurting the housing market, but helping curb inflation so we don’t go into a major recession. But they can’t keep interest rates this high for that long as many people are missing out on the dream of home ownership.”

Multiple experts and analysts think that the Federal Reserve will lower rates sometime later in 2023, possibly in time for the mid-summer housing market.

Shook’s best advice for buyers right now is to be patient. “The opportunity is going to be there,” he says, “You’ll find an opportunity for you to take advantage of a certain program, there’s more inventory on the market, and you’re not competing the way we were six to twelve months ago.”

A top agent can help you identify the opportunities, properties, and programs that fit your needs.

While it’s unlikely the housing market will crash, it will be friendlier to buyers. And that’s news that you can, hopefully, turn into the set of keys to a new home.

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