The past year in the housing market is perhaps best described as transitional. After a few intense years in the pandemic-era real estate market, 2022 saw a shift toward stability. Markets are returning to “normal” with a more balanced supply and demand than we saw in 2020 or 2021.
But what about 2023? What will the real estate market do over the coming year? Will inflation tank the housing market? Or will low inventory continue to push property values higher?
Here at Gatsby Investment, we keep a close eye on real estate market trends. And we aim to keep investors informed so that they are empowered to make sound real estate investment decisions. Our real estate analysts are continually reviewing changing market conditions, and we’re excited to share our 2023 real estate market trends with you now!
Before we begin, it’s important to note that real estate is highly localized; conditions will vary from one market to the next. This article will highlight the broad trends and projections from across the country. Then we’ll highlight a few interesting markets to watch in 2023.
What We Saw in 2022
Here are three key real estate market trends from 2022 that will set the stage for 2023.
Rising Interest Rates
With inflation exceeding 7% in 2022, the Federal Reserve was forced to raise interest rates in an effort to slow the flow of cash through the economy. From January to October, interest rates increased from around 3.5% to nearly 7% for a 30-year fixed mortgage. Higher mortgage rates made home loans substantially more expensive for buyers and investors.
The inflation of 2022 created an interesting environment for investors. On one hand, real estate serves as a hedge against inflation through increased property values and rental rates. On the other hand, the home price growth and rising interest rates caused by inflation make it more expensive to acquire new properties for your real estate portfolio.
More Sustainable Buyer Demand
Mortgage interest rate increases have served their purpose by bringing buyer demand down to more sustainable levels. During the buying frenzy of the pandemic, real estate professionals saw bidding wars for their listings, with many properties selling for far more than the asking price.
Back in August of 2021, the average American home sat on the market only 17 days before going under contract. By August 2022, the time on market was up to 27 days. This average still represents strong buyer demand compared to pre-pandemic years, but this level of demand is more manageable than we’ve seen in a few years.
Low Inventory
Low inventory has been a driving factor behind the Southern California housing shortage for nearly a decade, and it’s become a nationwide issue since 2020.
There simply aren’t enough homes available to meet demand. This is due to several factors, including
Too little new construction since the fallout from the Great Recession.
Zoning regulations that limit new construction and promote single-family lots, which limits the number of homes an area can accommodate.
Older homeowners opting to age in place, rather than downsize to retirement communities and condos as previous generations had done.
With this low inventory, the housing market has been able to absorb lower buyer demand and retain its property value gains from the last few years.
2023 Housing Market Forecast
With all that’s happened in 2022, what can we expect from 2023? Here are your most pressing questions for our 2023 housing market forecast.
Will Interest Rates Come Down?
Interest rates heavily impact the rest of the housing market, so it’s important to understand the most likely outcomes versus the possible outcomes.
One possible outcome is that interest rates continue to increase in 2023. The only scenario in which this makes sense is if inflation continues to grow. But this seems highly unlikely as the Fed’s dramatic increases over the past year have already helped to slow inflation.
Another possible outcome is that interest rates drop. But this also seems unlikely because inflation would need to return to a manageable 2-3% for a drop in rates to make economic sense.
The most likely outcome is that interest rates will stabilize near current rates of 6.5-7.5%. The Chief Economist for the National Association of REALTORS®, Lawrence Yun, is projecting that rates will stabilize at around 7% in 2023.
Will Sales Slow?
Nationwide, home sales were down in 2022, compared to 2020 and 2021. This slowdown will likely continue into 2023 due to low inventory and more moderate buyer demand.
Will Property Values Drop?
Property values might see a temporary dip in some markets. But buyers and investors should not wait for a big decline in prices, as it is unlikely to come.
For property values to drop, we would need to have real estate market bubble conditions. In that case, the bubble would burst, and prices would plummet, as we saw during the housing market collapse of 2007. But today’s market is very different from the housing bubble of 2006. That bubble was driven by irresponsible lending practices and overleveraged property owners. 2022’s market was not a bubble; the high property values were the result of legitimate supply and demand.
This means that we should not expect a drop in US home prices in 2023.
Will Rent Keep Increasing?
Rent will most likely continue to increase in 2023, just maybe not as much as it had in 2022. Moody Analytics project increases of 5-7% in the coming year. These increases would be stronger than pre-pandemic, but not nearly as high as the 10-20% increases we saw in 2022 in some of our best cities to invest in real estate.
Some rental niches will perform better than others. Family-friendly units, for example, are in extremely high demand as more prospective buyers have been priced out of homeownership by increasing mortgage rates.
Will Inventory Increase?
Builders have already scaled back on new construction as supply chains struggled and costs of labor and materials skyrocketed. The aging-in-place trend is going strong. And current homeowners are discouraged from making a move by the high interest rates. So there isn’t likely to be much additional inventory available in 2023.
Will 2023 Be a Buyer’s Market or a Seller’s Market?
Buyer’s market conditions and seller's market conditions are polar opposites with a full spectrum of conditions in between. There is no doubt that the pandemic era was a seller’s market. Values were skyrocketing, buyers were waging bidding wars and waiving contingencies, and homes were selling for far more than the asking price.
The market has calmed down, but we’re nowhere near buyer’s market conditions yet. You can expect 2023 to be a more balanced market, with buyers and sellers on a more even playing field than we’ve seen since before the pandemic.
Is 2023 a Good Time to Invest in Real Estate?
Is it a good time to invest in real estate? The short answer is that it’s always a good time to invest in real estate. Property values always appreciate over the long term, rents always go up over time, and you can always refinance when interest rates go down.
The more thorough answer is that you may want to consider short-term alternative investments in addition to traditional real estate investing, particularly if you’re concerned about cash flow in the next few years, and you prefer to keep your money more accessible. Short-term investments can be more liquid than traditional real estate investing. And some of the best short-term investments can provide strong returns, comparable to traditional real estate investing.
Hot Housing Markets in 2023
Which markets will be worth investing in over the coming year? Here are five hot markets for 2023.
1. El Paso, Texas
Texas has been hot for years. People love the warm climate, low cost of living, and lack of state income tax. But the larger metro areas like Dallas, Houston, and Austin have become too expensive for many buyers. With a median sale price of just $235,000, El Paso is the affordable alternative for investors looking for a low upfront cost.
2. Lake City, Florida
Just like Texas, Florida has seen exponential population growth over the last decade…and for all the same reasons. Just like major Texas metros, Florida’s major metros like Miami, Orlando, and Tampa have gotten too expensive for many investors. Lake City is primed for additional housing demand in 2023 due to its affordable home prices. As of December 2022, the median sales price in Lake City is just $175,000, and this is up an incredible 53.2% year-over-year, with plenty of room left for additional growth.
3. Los Angeles, California
With our talk of affordability in El Pasco and Lake City, you might be surprised to see the notoriously expensive Los Angeles on our list of hot housing markets for 2023. Yes, property values are high, but these high values lead to high rental rates. Studio apartments in LA currently command a median rate of $1,825 per month, up 17% from this time last year. Co-living units, designed for up to four roommates currently bring in nearly $6,000 per month! As our Los Angeles real estate market trends indicate, the in-demand LA rental market might be a good fit for investors looking to maximize rental income.
4. Louisville, Kentucky
Louisville might not have the same warm weather as Texas or Florida, but it does have a low cost of living and no state income tax. Louisville has room to grow in terms of both population density and property values. Rent for one-bedroom units averages $1,150, up 22% year-over-year.
5. Hartford/West Hartford Metro, Connecticut
Having been undervalued before the pandemic, the Hartford area of Connecticut had lots of room to absorb value growth. So, despite the fact that West Hartford sales prices are up 10.1% over last year, there is still room for additional gains in 2023. In fact, as of December 2022, the average West Hartford home is selling for 2% over asking.
Reach Your 2023 Real Estate Investing Goals with Gatsby Investment
Investing in real estate during a shifting market can be daunting. Rather than doing it alone, partner with the real estate experts at Gatsby Investment. Our winning investment strategies resulted in an average annualized return of 20.08% for our investors in 2022! We offer multiple investment types (from single-family flips to multi-family developments), with low minimum investment amounts and time frames as short as six months.
