The biggest trends that will drive residential real estate this 2023

by Zain Jaffer

The US residential real estate market experienced a dramatic shift over the past few years, due to the global pandemic and other exogenous factors. Naturally, many are wondering whether there will be a return to normality or if we can expect more surprises in 2023.

Overall, expert predictions point toward some much-needed stabilization within the residential market. In this article, I take a look at the four biggest trends we can expect over the next year and what they mean for different stakeholders.

The Market Is Cooling
One of the biggest real estate trends for 2023, which has the potential to impact the most players in the market, is the anticipated cool-down. The end of 2019 and 2022 witnessed an exponential rise in residential real estate prices, increasing 44% over a 36-month period. For comparison, the average rate of year-on-year appreciation in the US residential market has been 4.4% since 1991. Coupled with reduced inventory amid the uncertainty of the pandemic and stay-at-home orders, this spike in prices led to the hottest market we have seen in decades.

However, we have already seen the first signs of a residential real estate cool-down and can expect a shift toward a neutral market in 2023. There is even the potential to enter a buyer’s market in the coming years, but I do not expect this to happen just yet. The main driver behind this transition from a seller’s to a buyer’s market is an increase in supply and a drop in demand, as high mortgage rates and unaffordable property prices will push many first-time homebuyers and beginner investors out of the market.

Nevertheless, those with some capital but little experience in the real estate industry will have a better chance to access good deals amid weaker competition. In general, 2023 could be a good time to enter the property investment market—provided that you can access solid financing sources.

Home Values Will Increase Moderately
Throughout the last few years, the residential real estate market has seen a significant shift in prices. This steep upward journey began with the declaration of the global pandemic and accelerated in 2021.

Since mid-2022, nationwide property prices have already begun to flatten. While supply and demand forces drive regional differences across the market, one of the most important real estate trends is the prediction that the steep prices will end in 2023. Experts anticipate a degree of variation, but the majority of stakeholders expect a year-on-year increase of 2-3%.

However, it is important to distinguish between a moderate increase and actual decline as the latter is not on the horizon for 2023. Nevertheless, both homebuyers and beginner real estate investors can benefit from the slower rise in home values. First-time homebuyers and property investors, who were pushed out of the market amid skyrocketing prices and insufficient equity to fall back on for financing, might be able to reenter the market under these more favorable conditions.

Mortgage Rates Will Pose A Challenge To Buyers
A recent real estate development that introduced an additional major obstacle to many stakeholders is the increase in mortgage rates. The interest rate on 30-year fixed mortgages hit 7% in October to November 2022, reaching its highest level over the past two decades.

While we have been witnessing drops in interest rates since then, the truth is that the mortgage rates of the past decade were historically low and fully returning to these low levels is highly unlikely. A more realistic forecast is that mortgage rates will reduce only slightly—maybe to the 5% range. Therefore, higher mortgage rates will continue to impact both homeowners and investors in 2023.

Since rate differences are likely to be minimal, following the common advice to “marry the home, date the rate” by buying a home and refinancing later is not the smartest option. This concept fails to take the overall economic and financial environment into account. If there is more inflation and a high unemployment risk in the near to medium term, those who take this approach and are then laid off will not be able to cover their mortgage payments.

Meanwhile, current homeowners and investors are likely to hold off on listing their properties in 2023 as they do not want to give up the mortgages they secured when rates were significantly lower. This could prevent further expansion in housing inventory on the market.

Renewed Travel Will Boost Real Estate Investments
The last key trend for the 2023 real estate market is specific to investors. With Covid-related restrictions coming to an end, domestic and international travelers are looking to make up for missed opportunities. There are upward trends in both leisure and business travel, and these are expected to accelerate in 2023.

The anticipated growth in travel and tourism will lead to another boom in the vacation rental industry, with a forecast CAGR of 12.4% between 2022 and 2031. For investors, this translates into an increased demand for short-term rentals and ultimately renewed investment opportunities.

Moreover, the hotel sector is bouncing back and will continue to prosper as corporate travel resumes and flexible work schedules make it easy to work from anywhere. This will also open up opportunities within commercial real estate for both developers and investors.

Final Words
While some level of normality is expected to return to the real estate market in 2023, certain challenges will remain. By keeping these four predictions top-of-mind, I believe stakeholders will be well-prepared to tailor their strategies accordingly and achieve significantly better results.