Factors That May Impact the Real Estate Market in 2023 (and Should You Buy or Sell?)

The real estate market has been through some really wild times in the past few years, as anyone who hoped to buy or sell a house can tell you.

First came 2020 and 2021, when the beginning of the pandemic led many people to work or learn remotely. Suddenly, homes that served just fine in the past didn't seem built for a reality with multiple adults trying to work—and often, multiple kids attending school virtually. That led to skyrocketing home prices and crazy bidding wars as people looked to get a better space for spending all day at home.

In 2022, rapid inflation and changes in the bond market and Fed rates combined to cause a sharp increase in mortgage interest rates, which helped cool the real estate market slightly. It made it harder for buyers to afford the interest on top of the record-high housing prices.

So what can we expect in the 2023 real estate market? See what factors real estate experts predict will shape the housing market this year.

Interest rates are still high—but stabilizing

Mortgage rates started 2022 near historic lows—but quickly took a massive swing upward. "We started 2022 at 3 percent and closed the year out closer to 7 percent," says Melissa Cohn, regional vice president and executive mortgage banker for William Raveis Mortgage. "But we’ve gotten some signs that inflation is moderating a bit."

While some people blame the Fed, it's actually Treasury bonds that move mortgage rates. "The thing that is more closely correlated or related to 30-year fixed mortgage rates is the movement of the 10-year Treasury yield, and that is reflective of economic growth and inflation," says Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate. "We’ve been through some volatile times with that. "Mortgage rates seem to have topped out at 7.12 percent in October, "As of last check, Bankrate's average is down to 6.27 percent—certainly up from 3.85 a year ago."

The interest rate rise has had a big impact on buyers. "Sharp increases in mortgage rates in a relatively short amount of time take a dent out of housing affordability," Hamrick says.

Experts predict that the mortgage rates will continue to drop as the year progresses—but don't expect those 3 percent interest rates to reappear any time soon. "I wouldn’t bet on it happening in 12 to 18 months," Hamrick says. "A few years down the road, as inflation gets closer to the 2 percent target—and if there aren’t any other sort of remarkable events that would require that interest rates need to remain higher—it's certainly a possibility."

But if mortgage rates settle down, it will definitely give the market a boost. "As rates trend lower and stabilize themselves, we will see buyer demand pick up and more inventory come on the market," predicts Kerry Melcher, head of real estate at Opendoor.

Still, higher interest rates can actually be a boon for home buyers, if they play it right. "Historically when you buy when interest rates are high, you do better price wise—and then you can always refinance when interest rates drop," Cohn says.

Working from home (at least part time) is here to stay

Home offices will be an important part of many buyers' wishlists, as hybrid work and remote work have increased since 2020—and that's led many people to seek out better living spaces for work/life balance. That will continue to be a factor that brings buyers to the market—and influences their home decisions.

"If you're home all the time, you want to make sure that you really love being there," Cohn says. "We now see that many will be working from home, or in a hybrid work environment." Cohn sees many current buyers looking for spaces that will accommodate both their work and personal lives.

Fewer people may be looking to move right now

With so many people taking the leap into the red-hot housing market in 2021, there simply aren't as many people looking to move again so soon—and the spike in interest rates may have spooked potential buyers and sellers, leading to lower inventory in many markets. "Sellers have been hesitant to list their homes in recent months, so as mortgage rates stabilize, we anticipate more inventory will enter the market," Melcher says.

Housing prices are cooling, but not everywhere

Increased mortgage rates have put a bit of downward pressure on housing prices—but they aren't impacting every market equally. "We’re all seeing uncertainty in the market nationwide, with some markets slowing down drastically and some becoming more balanced, while others are still a seller’s market," Melcher says. "However, buyers are definitely showing optimism for the upcoming home buying season."

In many markets, you'll find that houses stay on the market longer, and buyers have more time to consider a few homes before they put down an offer. And the massive bidding wars are over. "Properties that are really well priced get multiple offers, but we're not seeing things going over the asking price by a meaningful number," Cohn says.

If you're holding out waiting for a bargain, you may be waiting longer than you expect. "I don’t see housing prices plummeting—so buyers may be waiting for shoe to drop that’s not going drop," Cohn says.

Economic turmoil could cloud the picture

Experts have been predicting a recession for more than a year now, but many indicators still aren't consistent with an economic slowdown. "The recent jobs report was much stronger than expected, which suggests that reports of the economy’s demise were premature," Hamrick says. "But there are still plenty of people who predict a modest chance of a recession."

The record-high inflation from 2022, which is starting to subside, also comes into play. "This period has been so remarkable and challenging, including historically high, sustained inflation," Hamrick says. "A lot [of the housing market] is going to be dependent on ability of households to spend. Personal savings have been eroded as wage gains have not kept pace with price increases. This is a highly uncertain period—and given what we see with consumer sentiment, people tend to act more cautiously then, even though unemployment is remarkably low." 

Life changes still overrule trends

Even in the bleakest or most extreme housing markets, people may not have the luxury of timing out the market for that perfect mix of pricing and interest rates, as their moves coincide with life events that require a big change in where and how they live. "Life cycles happen in every economic environment," Cohn says. "If you’re having a child and you live in a small one-bedroom or studio apartment, if your kids move out or your spouse dies, if you have to relocate for work, you may have to upsize or downsize."

Cohn suggests diving cautiously into this year's housing market. "This year is about being smart about what you do—you should have a better reason to buy than just because you want to," she says. "If you find the right house and are buying for right reasons, it's always the right time to buy."