Want To Know Where House Prices Are Heading In 2023? Watch Mortgage Rates

Many forecasts expect 2023 to be a negative year for housing, but the ultimate direction the market takes will be informed by mortgage costs. In 2022, mortgage rates doubled between the start of the year and late October rising from 3.5% to over 7%. That dramatically increased the effective cost of home ownership for many Americans.

That’s because most buyers finance a house purchase with a mortgage, and so the cost of the mortgage determines the home the buyer can afford. If mortgage costs double, then the house a purchaser can comfortably afford may approximately halve, all else equal.

U.S. 30-Year Mortgage Costs, 2022

Since exceeding 7% in October, 30-year mortgage costs have fallen back slightly to close to 6%. That largely reflects moves in long-term interest rates more broadly, which also moved up sharply in 2022 but have eased back from the highest levels reached in the fall.

Housing Affordability

Still, even if mortgage costs have fallen back from peak levels, the Federal Reserve Bank of Atlanta estimates that housing affordability is reaching lows that we haven’t seen in decades. That’s in part a reflection of higher mortgage costs, but in addition housing affordability was declining in 2021 even before interest rates rose, as house prices rose faster than incomes during the pandemic and its aftermath, squeezing potential buyers.

The U.S. Federal Reserve (Fed), set short-term interest rates, which can in turn influence the longer-term cost of borrowing. The Fed plans to continue to raise rates in 2023. While the Fed’s current plans are largely priced into the mortgage market which takes a very long-term view, it suggests that mortgage costs may remain elevated for some time. In fact, Fed Chair Jerome Powell said he viewed the U.S. housing market as “very overheated” last November. House prices have not declined much since that statement.

Regional Trends

It is also important to remember that housing in the U.S. is a regional market. Affordability measures suggest that home prices on the west coast may be relatively less affordable, whereas in other parts of the country, especially in the Midwest, affordability is less of an issue. That may impact price trends, and currently the U.S. west coast appears to be seeing relatively weaker house pricing in many markets. Seasonality complicates the picture too, with the winter months typically a slower period for the housing market compared to the summer making data a little harder to interpret.

What To Expect

With the sharp rise in mortgage costs recently and reduced affordability, it is likely that house prices will soften. That’s what many are forecasting and what current trends suggest is happening.

However, so far in many regions house prices have only given back some of the recent games from 2022 and have not yet declined in absolute terms on a year-on-year basis. 2023 may change that if current sluggishness in the housing market continues.

However, the chance of a recession matters too, if people lose their jobs that can, in turn impact the housing market. There’s some positive news there, because so far the jobs market has remained more robust than most expected. However, the backdrop for house price trends in 2023 appears relatively negative.