Inflation and rapidly rising mortgage rates will define the 2022 housing market. Furthermore, it has in many ways reset the market.

Mortgage rates more than doubled this year as the Federal Reserve (the Fed) attempted to curb inflation, which has never happened in a calendar year before. This had a cascading effect on buyer activity, the supply-demand balance, and, eventually, home prices. As a result of these changes, several buyers and sellers postponed their plans and decided to wait until the market felt more predictable.

What does this mean for the following year? In 2023, market stability will be what everyone truly wants. In order for this to occur, the Fed will need to reduce inflation further and maintain it low. Here are the predictions of home industry specialists for the coming year.

What’s Ahead for Mortgage Rates in 2023?

Moving forward, analysts agree that the focus will remain on inflation. Mortgage rates will rise if inflation remains high. However, if inflation continues to fall, mortgage rates are likely to respond. While there are early indicators that inflation is slowing as the year comes to a close, we are not yet out of the woods. Inflation remains a concern in 2023.

Experts are currently putting all of this into their mortgage rate forecasts for next year. Experts predict that rates will stabilize slightly more in 2023 if these projections are averaged. It is difficult for specialists to predict precisely where they'll land, between 5.5% and 6.5%. However, based on their average estimates, a more predictable rate is predicted (see chart below):

That means, we’ll start the year out about where we are right now. But we could see rates tick down if inflation continues to drop. As Greg McBride, Chief Financial Analyst at Bankrate, explains:

“. . . mortgage rates could pull back meaningfully next year if inflation pressures ease.”

In the meantime, expect some volatility as rates will likely fluctuate in the weeks ahead. If we see inflation come back under control, that would be good news for the housing market.

What Will Happen to Home Prices Next Year?

Supply and demand will always determine home prices. The more buyers there are and the fewer homes on the market, the higher home prices will rise. That's exactly what happened during the pandemic.

But things have changed this year. As a result of increasing mortgage rates, we've seen home prices moderate and the housing supply grow. The level of moderation has varied by location, with the greatest shifts occurring in hot markets. But, do experts think this trend will continue?

The graph below shows the most recent home price projections for 2023. As the different colored bars show, some experts believe housing prices will appreciate next year, while others believe they will fall. However, by taking the average of all estimates (shown in green), we may obtain a sense of what 2023 may hold.

The truth is probably somewhere in the middle. That means nationally, we’ll likely see relatively flat or neutral appreciation in 2023. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:

“After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”

Bottom Line

Mortgage rates will define the 2023 housing market, and rates will be decided by what occurs with inflation. A trusted real estate advisor is the greatest way to stay on top of what experts predict for next year. Let's get together.