BAM’s Key Details: 

  • Zillow economists have made their predictions for the 2023 U.S. housing market
  • As affordability remains the biggest issue, the Midwest will take center stage
  • According to Zillow, the affordability crisis will stabilize, if not improve, in 2023

The Zillow Economic Research team has made a few bold predictions for the U.S. housing market in 2023. The word “affordability” comes up a lot, which makes sense given its status as housing’s biggest issue right now. 

If Zillow is correct, we could see an improvement in that arena—or, at the very least, stabilization.

And with the Midwest standing out among the four major U.S. regions for showing a month-to-month increase in pending home sales, there’s more than one reason to take a closer look. 

Zillow’s Top Five Predictions for 2023

Zillow’s economists expect to see growth in the following five trends: 

  • Friends and family members (other than spouses) buying homes together
  • The Midwest standing out for affordability and inventory
  • The affordability crisis stabilizing—if not improving
  • The number of first-time landlords increasing
  • New construction focusing more on rentals

Americans finding ways to make payments on a roof over their heads is going to drive the market next year. Where costs are lower, we’ll see healthier sales and inventory levels. If rent is less expensive than a new mortgage, we’ll see increased demand for rentals — something builders and landlords understand. Affordability is going to be the biggest factor in housing for 2023, but there’s room for optimism on that front if mortgage rates recede.

Skylar Olsen

Zillow Chief Economist

The Midwest will be front and center

The Midwest will take center stage as affordable housing becomes the top priority for homebuyers across the country. Because unlike every other region of the U.S., home prices in Midwest metros haven’t risen to the point where mortgage costs become a financial burden. 

The share of income going to monthly mortgage payments has stayed within sub-30% levels across Ohio, Pennsylvania, Kansas, Iowa, upstate New York, and smaller Illinois metros, allowing more first-time buyers to become homeowners. 

Plus lower rents in these areas make it easier for renters to save for a down payment. 

For example, a typical mortgage payment in Topeka, KS, is $1,269 — less than one-third of Sacramento’s $4,129, for a savings of $2,860 a month. 

Another key component of a healthy housing market is having more available housing options for buyers to choose from, and in this, too, the Midwest stands out. Inventory hasn’t cratered compared to pre-pandemic levels. And declines in new listings are smaller across the Midwest than the national average, thanks to more consistent buyer demand.

Buying a home with relatives and friends will gain momentum

While a growing percentage of Americans aged 50 and older are living alone, across the board, more people are choosing to buy a home with friends or family members (other than spouses) to share the cost of housing. 

In many cases, joint mortgage applications are the only way these borrowers can qualify for a mortgage. Higher mortgage rates make it impossible for them to obtain a loan in the amount they need without a joint borrower’s income. 

It’s a risky arrangement but still a valid way for many to become homeowners. And Zillow economists expect this trend not only to continue but increase in 2023. 

According to a Zillow survey, among successful recent homebuyers, 18% purchased a home jointly with a friend or relative other than a spouse or partner. 

And 19% of prospective homebuyers responding to the survey plan to buy a home with a friend or relative in the next 12 months. 

As more millennials and Gen Zers enter the housing market in 2023, more are planning to buy homes jointly with their “besties,” putting those relationships to the ultimate test. 

The top reasons given for doing so are affordability and qualifying for a mortgage. 

Thanks to higher mortgage rates, mortgage payments for a typical home in the U.S. have doubled, claiming 37% of the median household income in October—well above the 30% threshold at which housing costs become a financial burden. 

That percentage was 27% in January. 

The affordability crisis will stabilize—if not improve

While they can’t promise an improvement, Zillow economists do expect the affordability crisis to stabilize in the coming year. 

In the meantime, high mortgage rates are not only pricing buyers out of the market, but they’re also taking a toll on new inventory as sellers decide to sit tight with their current homes and historically low mortgage rates. 

Thanks to increased demand for rentals (those sidelined buyers still need a place to live), rents have grown faster than wages, making it more difficult for renters to save up for a down payment. Renters of color are statistically more likely to experience rent increases for their units. 

The affordability issue will remain central to the housing market in 2023, but Zillow’s housing experts believe there’s a decent chance we’ll see some improvement. 

At the very least, the market should stabilize in the coming months, making it possible for households to plan and budget for housing-related decisions in the near future. 

In agreement with other experts on the housing market, Zillow expects home values to remain relatively flat in 2023 and even to fall in the areas where prices rose sharply during the pandemic, as well as pricey coastal markets seeing an exodus of buyers looking for more affordable housing. 

Mortgage rates are now trending slightly downward as economists see some easing in inflation and the tightness of the labor market. 

If we’ve actually reached the apex of inflation, that trend should continue. 

And with more buyers returning to the market, rent growth should hew closer to historical norms. As it is, rent growth has already decelerated quickly this year, dropping from a peak of 17.1% in February to 9.6% by October. 

Rents actually fell in October for the first time in two years. 

2023 will see a surge in first-time landlords

With mortgage rates in 2020 and 2021 at record lows, homeowners seized the opportunity to become investors by buying second homes, either to live in or to rent out. 

As rent growth continues, more investors will see the advantage of renting out their second homes to earn a regular rental income that exceeds the mortgage payments based on those record-low rates. 

That potential for rental income, combined with the decidedly bearish expectations for stock markets and the number of buyers sidelined by higher mortgage rates, will incentivize more of these second-home owners to become landlords—especially in areas where housing demand is stronger, like the Sun Belt

Rents will climb faster than home values in 2023, and more homeowners will choose to rent out their second homes (or third, etc.). 

New construction will focus more on rentals

The number of single-family homes currently under construction, thanks to the pandemic construction boom (up 42% from pre-pandemic levels in October), will incentivize more builders to offload properties by not only cutting prices but even lowering the mortgage rates for new construction buyers. 

With the drop in buyer demand, the expected temporary surplus of newly-built homes will continue driving price reductions for these homes—and potentially for existing homes, too, despite homeowners staying put to keep their record-low mortgage rates. 

Builders of multi-family units are much more bullish, with the number of multi-family units starting construction each month up 8% from pre-pandemic levels in October. 

The increase in multi-family permits reflects a strong vote of builder confidence. And that confidence is behind the rise in construction of build-for-rent homes, as many sidelined buyers will need to keep renting into later life states as long as they’re unable to qualify for (or afford) a mortgage.

Top takeaways for real estate agents

These five bold predictions from Zillow offer some comfort in the midst of an uncertain economy and shifting market. It’s more important than ever for agents to stay on top of industry news, trends, and data—and to communicate exactly what your clients need to know.

The bar has been raised for agents heading into 2023. Make sure you’re ready to do what it takes to be the advocate and knowledge broker your clients need.