Midwestern markets will heat up, and more friends and family members will pool their money to buy homes together in 2023, as people look for new ways to overcome the housing affordability crisis. However, that crisis will stabilize — if not improve — from its pandemic-era apex. New construction will be focused on rental units, and we should see a jump in homeowners becoming first-time landlords. Those are among a slew of new predictions the Zillow Economic Research team has made for 2023.
1. The Midwest to feature front and center in 2023
While in the grip of the pandemic, the Sun Belt had a strong pull on American movers, easily meeting last year’s forecasts for an aggressive rise to housing market temps in 2022. Florida markets dominated the annual appreciation leaderboard in 2022, with Tennessee, the Carolinas and Texas metro areas peppering into the top spots among the 100 largest metros. The heat will stay on in the Sunshine State, to be sure. But as affordability has become the key driver of both supply and demand in the market, places that still feature reasonable prices are already seeing momentum shift their way, and should have the healthiest housing markets in 2023.
Enter the Midwest. Unlike nearly every other region in the United States, prices in most Midwest metro areas haven’t run up to extremes. Mortgage costs as a share of income are still within healthy, sub-30% levels across Ohio, Pennsylvania, Kansas, upstate New York, Iowa and smaller metros in Illinois, which will allow first-time buyers to take the plunge. Lower rents and home prices in these areas make it easier to save up for a down payment. Having available houses to choose from is another key component of a healthy market, and the Midwest stands out – inventory isn’t in a massive hole compared to pre-pandemic times, and declines in new listings are smaller than the national average, encouraged by the more consistent demand from buyers.
2. Buying with friends and family will gain momentum
Soaring housing costs were a popular party conversation topic in 2022. But plots of buying a home with a friend or non-partner relative turned out to be more than idle chatter for a surprising share of folks. With housing costs rising far beyond previous affordability norms, those chasing down homeownership are turning to unconventional means of making it pencil out financially, and this should continue in 2023.
A Zillow survey fielded this spring found that among successful recent homebuyers, 18% had purchased along with a friend or relative who wasn’t their spouse or partner, and 19% of prospective homebuyers intended to buy with a friend or relative in the next 12 months. For both groups, affordability and qualifying for a mortgage were cited as the top reasons for buying together – challenges that are now even more acute. Mortgage payments for a typical U.S. home rose from needing 27% of median household income in January to 30% in March to 37% in October – far beyond the 30% threshold where housing becomes a financial burden.
3. Affordability crisis will stabilize, if not improve
Affordability – the share of median income required to pay housing costs – is the biggest challenge for buyers, sellers and renters today. Monthly mortgage costs have doubled since 2019, driven by pandemic-era price hikes, and to an even greater degree, by rapid mortgage rate growth this year. High mortgage rates are not only pushing buyers to the sidelines, they’re tanking new inventory as homeowners decide to hang on to their current houses and low rates. Renters are not exempt from the madness. Rents have grown faster than wages, making it harder to save up for a down payment. The average hourly wage has grown 23% over the past five years, but rents are up 37% during that time after a pandemic-era surge.
Affordability will continue to be the driving force in the housing market in 2023, but there is a decent chance it will improve. At the very least the market should stabilize, making it possible for households to budget and plan for housing decisions coming up in the months and years ahead.
Zillow expects national home values to remain relatively flat next year, and even fall in the most affordability-challenged markets. Mortgage rates, highly impactful to the mortgage payment, are seeing some recent and encouraging progress downwards as inflation and labor market tightness show small signs of easing, enough to lead some to suggest the Federal Reserve may ease its aggressive monetary contraction. If we’ve actually turned the corner on inflation, that should continue. Volatility in mortgage rates could continue through early 2023, however, an ongoing challenge for those who saw their ability to qualify for the same mortgage change on a monthly or even weekly basis this summer. Rent growth should hew closer to historical norms next year as well. Annual growth has come down quickly from a massive peak of 17.1% in February to 9.6% year-over-year by October. Rents actually fell during the month of October, the first time in two years, a signal of a return to regular seasonal patterns. Meanwhile, builders are working to increase the supply of rental properties at record pace.
4. Surge in first-time landlords in 2023
The record-low mortgage rates of 2020 and 2021 spurred lots of investment in a second house, especially from mom and pop investors getting their second property. As rent growth continues its aggressive pace, many of these second homes have an even better potential to yield regular rental income above mortgage payment fixed with record low rates. The potential for regular income, bearish expectations for stock markets in 2023, and the big pull back from home buyers due to higher mortgage rates may reinforce the incentive to hold onto those investment properties, especially in areas like the Midwest Sun Belt, where household formation and housing demand is stronger. Rents should rise faster than home values over the next year and many will choose to rent out their property.
5. New construction strength will be in rentals
Despite a clear effort to pull back on permits and starts in single-family construction, the sheer number of units currently under construction after the pandemic construction boom (up 42% from pre-pandemic in October) will mean continued rolling deliveries to the market even as demand pulls back. This expected temporary glut in new homes available are driving price reductions for new construction, and potentially in the existing home market too, which otherwise will continue to experience low inventory levels as existing homeowners hold onto their homes and their record low mortgage rates.
To mitigate the bloat in builders’ portfolio of finished new homes, builders will encourage buyers with lower prices, but more impactfully to the affordability of that mortgage payment to offer to buy points and lower the mortgage rate of new construction buyers.
Builders of multi-family units are, in contrast, much more bullish. The number of multi-family units to start construction each month has fairly steadily increased, reaching 8% up from pre-pandemic in October. Elevated multi-family permits also point to a strong vote of confidence in continued demand for rental units despite looming recession fears. This confidence will also encourage more construction of build-for-rent homes, as many would-be homeowners will need to continue renting into later life stages if now unable to qualify and move forward with a purchase of their own.