Redfin’s 2023 Forecast: Sales Slump, Rates Drop, and The Forever-Renters

Dave:
Hello, everyone. Welcome to On The Market. I’m your host Dave Meyer, and I’m doing this one solo. I’m all by myself here, but we’re going to have an awesome show. We’re going to talk about and sort of summarize some of the major predictions for the 2023 housing market.
Now if you follow the show and hopefully you listen to lots of episodes, you’ve probably heard a recent episode where we had the full panel and everyone came on and talked about their expectations for 2023, which was a really fun show. But we’ve also want to know what other experts in the industry, perhaps people who maintain or build their own financial models or forecast models think are going to happen next year.
And one of my favorite sources for data in the entire real estate industry is Redfin. If you listen to this show or follow me on social media, you probably hear me quote it a lot. They actually have a ton of free data too. So if you want to download data or use their, if you want to just understand data about your local market, highly recommend you check out the Redfin data center.
This is not some paid sponsorship, I just use that website all the time, so you should check that out. But they also put out some reports and predictions based on all of their research. And today, I’m going to go through some of the predictions that they are making for 2023. I’m going to explain mostly why they think these things are going to happen.
I’ll provide my own opinion on these predictions, provide some color, and I think it will give you a really good sense in a holistic manner of what is going to happen or what is sort of the most probable thing to happen in 2023. Of course, no one knows what’s going to happen, there’s just so much and unending uncertainty with the economy.
Just in the last couple of weeks we’ve seen inflation numbers that were very encouraging, but then a few days later, the Fed raised the interest rates anyway, very uncertain if there’s going to be a recession next year. So we don’t know what’s going to happen, but we always, as investors should be developing our own investment thesis.
Right? We should keep in our minds what we expect or at least think is the most likely scenario in the coming months so that we can make decisions. Because if you just have no opinion or just say, “There’s, I have no idea what’s going to happen,” it’s really hard to make decisions.
Whether even if your decision is to hold off on investing, that’s okay, but that should be based on some thesis or belief about what’s going to happen in the housing market and what’s the best way to use your money in the coming months. So hopefully, this show’s going to be super helpful to you. I think there’s some really fun and interesting facts in here. We’re going to take a quick break and after that we’ll come back with these predictions.
Redfin’s first prediction for 2023 is that home sales will fall to their lowest level since 2011 with a slow recovery in the second half of the year. So I actually strongly agree with this. If you’ve been following data over the last couple of months, you’ve seen that the volume of home sales, and I just want to make sure that you know that this prediction is not about home prices.
This is about home sales, the number of homes that transact every single year. That is what Redfin is predicting is going to fall to the lowest level since 2011. And I actually agree with this. I don’t know necessarily know if we’ll fall to 2011 or something similar to that, but I do think we’re going to see a very big decline in home sales volume.
And this is really important. I think most people who are casually looking at the housing market sort of pay attention to housing prices first and foremost. But housing volume drives the entire industry. It has a huge impact on prices first of all, because if volume goes down, that usually signals that there’s less demand in the market and that can soften prices.
But it also has huge implications for all of the different services, for example, being a real estate agent or loan officers or all the different things that tangentially touch the real estate investing world. And so what Redfin is saying here is that they think that there’s going to be a huge decline in 2023.
And I agree, but let me just caveat saying why I agree with this. It’s because I think the first half of the year is going to see big declines in a year over year sense. And when we compare things in a calendar year, that’s how everyone wants to talk about things.
But when we look at 2022 and what’s happened over this last year, you see two very different markets. In the first half of 2021, things were booming, prices were going up like crazy, homes were transacting really quickly. Second half of 2022, we’ve seen a change to that.
So when we look at 2023 and we compare the first half of 2023 to 2022, it’s going to look like a huge decline, right? Because last year the first half was crazy and we all know the market is cooled and it’s not going to go crazy again in the first half of next year in my opinion.
And so we’re going to see a really dramatic change in year over year numbers for the next couple of months, but that to me doesn’t really necessarily signal that things are necessarily getting worse from where they are right now because we’ve already seen home sales volume tank. Right? Since June, they’ve been going down. We’re now, I’m recording this in the middle of December and we’re see already seeing that home sales volume is down.
And so this is why I think Redfin is saying that they’ll see a slow recovery in the second half of next year because again, first half of the next year we’ll be comparing to a crazy 2022. Second half of next year, we’ll be comparing to a slow half of 2022. And so we might see a recovery in home sales on a year over year basis towards the second half of next year.
So why is this happening? Why are we seeing this decline? Well, it’s pretty obvious, right? It’s because we have low affordability, right? Buyers just don’t want to buy right now. Sellers don’t want to sell right now. That is a perfect situation for lot, very few homes to start transacting. I’ve called it a stalemate, we’ve called it a standoff, a tug of war, whatever you want to call it.
Basically, sellers have anchored in their mind the prices from June of 2022. Whether that’s right or wrong, I think it’s a little bit crazy, but basically they’re like, “If I had sold in June, I would’ve made 20% more.” And now they’re going to hold out for that number for better or worse. That’s what they want and they don’t want to sell. Buyers on the other hand, just can’t afford prices the way they are right now.
Prices went up and they were affordable when interest rates were two and a half or three percent, but now that they’re six and a half percent, or I think they’re actually lower than that as of this recording, but they’re averaging around six and a half percent right now. Six and a half percent, it’s just not affordable so they don’t want to buy. And until one of those things change, I don’t think we’re going to see home sales volume increase. And to me, the thing that has to change is mortgage rates.
And we’ll talk about that with the second prediction. Prediction number two from Redfin is that mortgage rates will decline ending the year below 6%. To me, this is the single most important variable in 2023. And all of the other predictions that Redfin is making, all the other things that I am saying here are really predicated on what happens with mortgage rates. I just said this, right?
What is going on in the housing market is affordability is too low and that is preventing people from buying, it’s pushing down prices, so people don’t want to sell. The main thing, affordability has three components. Right? It’s home prices, debt, mortgage rates, and wages. And wages are still going up a little bit, but that happens pretty slowly. Home prices are coming down, but probably not enough to offset the increase in mortgage rates so far.
So what has to happen to restore some energy to the housing market is mortgage rates have to go down. And so this prediction, mortgage rates will decline ending the year below 6% would I think restore some energy to the housing market. But I don’t think we’re going to see this. Again, I think 2023 is going to be just like 2022 in the sense that it’s going to be a tale of two halves, right?
2022, you can’t describe the housing market in 2022 because the first half and the second half were totally different. I think we’re going to see something similar in 2023 where the first half of 2023, we’re going to still see a lot of uncertainty in the economy.
Mortgage rates are probably going to hang out where they are right now. And the mid-sixes might go up near seven, again, might hover near six, but let’s say between six and seven is probably going to be the average in my opinion for the next couple of months. But then in the second half of next year, a lot of things could play out, right?
Inflation, there is a case that inflation goes down, there’s a case that there’s a huge recession and mortgage rates go down because of that. There’s a case that the Feds cut interest rates. I think there are a lot of different scenarios where mortgage rates actually go down. And I know that is confusing to people because just two days ago the Fed raised interest rates again and actually mortgage rates went down right after that.
So let me just take a second and explain some of the different scenarios as why Redfin believes mortgage rates will go down in 2023. And I tend to agree with this. So the first is the more obvious scenario, which is that slowing, inflation slows and the Fed stops raising their Federal funds rate. Now the report that came out in mid-December reflects November numbers and shows that inflation on top level came down from 7.7% to 7.1%.
Don’t get me wrong, 7.1% inflation is unacceptably high. It is crazy. It’s still one of the highest numbers we’ve seen in decades. But that is the fifth month in a row that the CPI has fallen. And I think the most important thing to take away from the CPI report from the other day is that prices only went up 0.1% in March. That is one of the slowest monthly increases that we’ve seen.
And when we talk about the core CPI, which takes out the volatile food and energy sectors, that only went up 0.2%, which is the slowest monthly increase since August of 2021. So we are really seeing the pace of inflation start to come down. Now I know most Americans are not happy with inflation. It’s still way too high. I totally agree. But this is the beginning of potentially a trend.
And if this trend continues, for example, if we see 0.1%, month over month inflation rates will be below the Fed’s target by June. So this could signal that inflation is starting to get under control. And if that happens, the Fed could start stop raising their Federal Fund rate, which would stop putting upward pressure on bond yields and could make mortgage rates settle down. We could also see the spread between bond yields and mortgages start to come down.
So that is one scenario that is looking more and more likely right now because we’ve seen good inflation prints the last couple of months. And in my opinion, there are some things that point to the inflation coming down even more. Mostly shelter costs. So this is kind of wonky, but the way that the, this last month, the main thing that was keeping inflation high was shelter, which is basically rent and something that they call owner’s equivalent rent.
Basically, what a homeowner would buy, would pay in rent if they were renting their house instead of owning it. And the way that is collected in the CPI just kind of sucks. It’s really lag, it lags a lot. And so it’s still showing in the CPI that rents are going up really rapidly. But if you look at more current private sector data, there’s tons of it out there, RealPage is a really good one if you want to check it out.
You can see that rents are flat or falling in most markets. And so that reality has been happening since July or August, but it’s not reflected in the inflation report yet. And that is the main thing showing inflation going up in CPI. So when the real data starts to flow through the CPI in the first quarter of 2023, I think we’re going to see inflation come down even more.
So I think this is one likely scenario. The second likely scenario that could push down mortgage rates, and I’ve talked about this before, is basically a recession. And I know that is confusing, but basically what happens if the Fed over corrects, if they raise interest rates too much, which is another likely scenario right now, right?
Inflation is going down, but they’re still raising interest rates. So another likely scenario is that there they over-correct and that there is a global recession. What happens in a global recession is that investors tend to look for safe investments. And one of the safest investments in the world is US treasuries like the 10-year bond.
And when people want that bond, that increases demand and that pushes down to yields. Again, I’ve said this many times on the show, but bond yields dictate mortgage rates. And so when that pushes down yields, that could push down mortgage rates. So that is another very likely scenario. Right? We could have a big recession, bond yields could go down and mortgage rates could come down with it.
At the same time, if there’s a big recession, the Fed might realize that they over-corrected and cut interest rates. Another thing that can help bring down mortgage rates. So those two scenarios I think are probably the more likely and why I agree that mortgage rates will probably come down in 2023. There is one scenario where mortgage rates rise though, there’s probably few, but the most likely that I see is where the Fed raises rates like they are right now, but we don’t go into a recession.
They call this kind of a soft landing. But maybe they keep raising interest rates, which will put upward pressure on bond yields and mortgage rates. But if we’re not in a recession, then we won’t see this huge demand for bonds that pushes down yield. So that is another scenario that could happen.
I don’t know which of the three is most likely, but to me, two of the most likely scenarios push mortgage rates down and only one of the three likely scenarios pushes rates up. And so to me, I think the more probable outcome, and again, we don’t know what’s going to happen and you should be thinking in probabilities, that’s the best way to think as an investor, in my opinion. I think the most probable scenario is that mortgage rates go down in the second half of 2023.
I don’t think this is going to happen right away. So that’s my reaction to prediction number two, that mortgage rates will decline. I don’t know if they’re going to be below 6% too. That’s a specific forecast that I don’t know, but I think they’ll be somewhere between, let’s say five and a half and six and a half.
Right? So they will come down from their recent average, and I think that will probably reinvigorate the housing market a little bit. The third prediction, home prices will post their first year over year decline in the decade, but the US will avoid a wave of foreclosures. Strongly agree on both of these. So number one, Redfin is predicting a 4% year over year drop. I’ve made my predictions on YouTube, you can check those out.
But my estimate, and I don’t maintain financial models, I basically, I’m a data analyst. Right? I don’t have all these economic models, but I can look at historical data and trends. And my opinion is that we’ll probably see a national level decline in housing prices somewhere between three and eight percent next year. And remember that this is on a national basis.
Every market is going to behave differently and you have to really understand each of your markets. So I’m just talking about on a national basis. And I think the really interesting thing here about Redfin’s prediction is that they’re basically admitting, if you look at the details, that they don’t really know. That this is a really hard one to predict.
So in each of their predictions, they provide what they call a base case, which is what they think is going to be the most likely. They provide upside, so this is what happens if everything goes well. Or downside. Basically, if everything goes poorly, what’s the worst case scenario. In data analytics or data science, you often see something called a confidence interval. Right? Or you see basically a band of likely outcomes.
And again, this is sort of, maybe this is becoming a theme for this episode, but you want to think in probabilities. Right? People are making these predictions like, “It will be 4%.” But really when they do their analysis, it shows that it’s the most likely is 4%, but they are really confident that it’s going to be between 3% and negative 11%. Right? That’s really what the math comes out to be, and that’s actually what they say on their website.
So this is the headline that they decline 4%, but when you look at the details, what they’re saying is that they see a scenario, it’s not their most probable scenario, but they see a scenario where home prices actually go up 3% next year. That’s probably if mortgage rates drop considerably. They are base case what they think the most likely scenario is negative 4%.
And they also think the downside is negative 11%. So they also see a scenario, again, not the most probable scenario, but they see a scenario where national housing prices could go down 11%. So I think that this is a good analysis honestly. I do think that the most likely scenario is mid-single digit declines. Again, I’m saying negative three to negative eight percent is my belief. But there is downside risk.
There is a chance that things go way worse. If there’s huge job losses or foreclosures or mortgage rates go to 10%, yes, that can happen. I don’t think that’s the most likely scenario, but that can happen. There’s also a case that mortgage rates fall and home prices go up next year. I don’t think that’s the most likely scenario, but that can happen.
So I think this is a pretty good sober analysis of what’s happening in the housing market. And I am personally anticipating a, like I said, a single digit decline in national housing prices next year. Now there was a second part of this prediction, which was that the US will avoid a wave of foreclosures, and I definitely agree with that.
In the next couple weeks, we’re going to have Rick Sharga from ATTOM Data on. He is an expert in foreclosures. We already did the interview. We’re banking a couple shows before the holidays. So I already spoke to Rick yesterday and he was talking about foreclosures. And although there is going to be a tick up, we’re still far below normal levels and there’s very low risk of foreclosures.
People, very few people are underwater on their mortgages right now. Even, Redfin came out and said this, that even if their base case of negative 4% growth next year, if home prices go down 4%, only 3% of people who bought during the pandemic would be underwater. So that’s very few people would be underwater.
Being underwater doesn’t mean you’re going to go under into foreclosure as long as you keep making your payments. So that means very few people are at risk of foreclosure. And this is why Redfin, and I totally agree, I strongly agree with this, that there won’t be a wave of foreclosures. If you want to learn more about that, check out the interview with Rick Sharga.
It’s coming out in a week I think. Really fascinating conversation with Jemele, Rick and I, so check that one out. All right. So that’s what everyone wants to know, right? That’s the big headline. Right? I think housing prices are going to go down on a national level in the single digits. So does Redfin. Prediction number four, the Midwest and Northeast will hold up best as overall markets cool. I tend to agree with this one as well.
I do think that most markets are going to be impacted and go flat or even slightly negative, but when we look comparatively, it’s kind of obvious. Right? The cities that grew the most during the pandemic are at the biggest risk. You see these cities like Reno and Boise and LA and Seattle and Phoenix and Austin that grew 20, 30, 40 percent. It’s not sustainable.
The houses are not affordable in those markets. And so they have the largest likelihood of coming down, and most of them are already coming down. A lot of them have come down on a month over month from their peak. But what we really care about, again, don’t believe everything you see on the internet when people say things are crashing, look year over year.
That’s what you should care about when you look at a regional housing market. Year over year, they are starting to come down and that’s to be expected. So I do think that this is a good analysis. If you look at some of the lead indicators for markets in the Northeast and the Midwest. And lead indicators are just data points that basically help predict future data points.
I think I like to look at inventory days on market, new listings. If you look at those things in cities like Boston or Philadelphia or some areas of Connecticut, Chicago, Madison, some of these cities in the Midwest and the Northeast, they look more stable. They don’t look like they’re reverting back to pre-pandemic trends in the same way as some of these West coast cities.
Look at Denver, look at Austin, look at California. You see inventory is spiking, days on market is spiking, and that puts downward pressure on prices. So I agree with this. I do also think that there are some areas in the Southeast that are overheated, and but there are some areas that are going to do well. So think about a city like Tampa in Florida.
Florida in general probably has some markets that are going to see some declines, like the villages. I think, I don’t even know much about it, it’s a planned community. But it just went crazy. And there’s a lot of analysis out there that shows that the villages, for example, is going to take a hit, big hit. But I think areas Tampa, for example, seem to be doing really well.
So I think there are still subsections in the Southeast, in the West that are still going to hold up. Okay, but we’re just talking generally speaking. If you want to talk on a regional basis, then yes, I agree, Midwest, Northeast are probably going to do best as a whole. But there are still markets in North Carolina that are going to hold up great and in the Southeast.
In Texas, there are markets that are probably still going to do well. Even in California, even in the West, there are some markets that’ll do well, but on overall I agree with this. Brings us to prediction number five. Rents will fall and many Gen-Zers and young millennials will continue renting indefinitely.
All right, I have a lot of opinions about this. I’m going to just say I don’t necessarily agree with this. Rents will fall. Yes, I think rents are falling in some cities. We’re seeing household formations slow down. But I think the rent is going to be very, very regional. Right? Some markets are definitely going to see rents continue to go up, right?
Areas with large population growth, wage growth are probably still going to see rents go up. And I do think some markets will see rents go down, probably in areas where there’s a lot of large multi-family complexes coming online. If you look at some of the data coming out, there are areas where there’s just so many multi-family units coming on, specifically in the second quarter of 2023.
Those areas could see rents come down. I mean, it’s areas like, honestly, Arizona is one of the most guilty areas, Texas and Florida. So you might see rents come down, but generally speaking, rent is very sticky and I don’t think it will fall that much. You might see 1%, 2%, 3% drops. On a national basis, I would be surprised if we see rent go down more than one or 2%.
So that could change. It could be wrong, but rent is generally really sticky. Just for context, back in 2008, the peak to trough home prices fell over 20%. Rent fell six to eight percent depending on who you believe. So it’s a fraction, it’s a third roughly of what home prices fell. And I think that’s probably going to be true. Rent is just stickier than home prices generally.
Now I take exception to the second part of this prediction where they say that Gen-Z and young millennials will rent indefinitely. Now I don’t know what that means. Does that mean they’re going to rent for the next two years? Yeah, sure, probably. But I feel like for the last 15 years people have been saying, “Millennials don’t want to buy houses, they’re renters forever. We’re becoming a renter nation.” And it’s just not true.
I don’t know how to say it in more ways, but the data just does not support this. First of all, the home ownership rate in the United States is relatively stable for the last 60 years. It goes between 63% and 69%. Right now we’re at 66%. So we’re right in the average over the last 60 years. So saying that we’re a renter nation, not true currently. Of course things can change in the future, but right now that is not true.
And at least as of the last census reading, it was trending upward. So I don’t know if that’s going to continue, but the idea that we’re all of a sudden all renters is just not accurate. The second thing is that people, since the Great Recession have been saying millennials don’t buy homes. They don’t want to buy homes. It’s not that they don’t want to buy homes, it’s that they couldn’t afford homes.
If you look at all the data, it shows that they couldn’t. They weren’t earning enough money. This was the aftermath of the great recession. Wages were really suppressed and they couldn’t afford homes. Now when interest rates dropped and there was an infusion of cash into the market during the pandemic, millennials bought a ton of homes. It wasn’t that they didn’t want to buy homes, it’s that they couldn’t afford homes.
And as soon as macroeconomic conditions allowed them to buy homes, we saw this massive increase in demand for homes from millennials. And that is one of the major drivers that pushed up home prices over the last couple of years. So this idea, I don’t know if Redfin is saying this, I don’t know if they’re saying that they’ll never buy homes, but this idea that millennials or Gen-Z or any generation for that idea doesn’t want to own their own home, I think is really overstated.
And it’s just a matter of affordability. When people can afford homes, they tend to want to buy homes. And I think that is not going to change. So again, I do agree that given the low affordability in the entire housing market right now, young people are going to be hit the hardest by that. Right? They have the least time to save, they’ve tend to have the lowest income.
And so it’s likely that Gen-Z and young millennials will not be jumping into the housing market right now. But as soon as they’re able to, I think they will jump in. All right, last prediction. They did make 12 predictions, but I sort of picked my favorite so not to keep you forever here. But the last prediction that they’ve made here is builders will focus on multi-family rentals.
And this is another one I’m a little bit conflicted about. So if we’re talking relatively, are builder’s going to build more multi-family than single family homes in 2023? Sure. Yeah. I believe that because there is a national housing shortage and it is more efficient to build multi-family than it is single family. But I just generally think construction is going to be down in 2023.
We are seeing, I just said sort of in the last when we were talking about rents, that there is a lot of supply coming online in multi-family rents in the next year. Not so much that it’s going to make up all of the housing shortage over the last couple of years, but it’s a lot. And so I do think if I were a builder, I would sort of want to see how things play out over the next couple months with rents, with cap rates, with interest rates.
And I wouldn’t be building a lot. That’s just me. I’ve never built a house, so take that with a grain of salt. But I know I talk to a lot of syndicators, people who build, and I think that’s the general sentiment is, yes, maybe if you are building, you’re going to build multifamily instead of single families.
But generally think speaking, I think we’re just going to see lower construction, which might help stabilize the market a little bit and not see a glut of supply. But overall, the US just needs more housing. And so I hope that I’m wrong about that and I hope that we see more construction. Because generally speaking, to get the market to a place of more affordability where investors and homeowners can buy and the market becomes less volatile, right?
It’s just so volatile right now. And that’s not good for everyone. And I know people think that’s odd coming from a real estate investor like, “You don’t want to see the market go up like crazy? No, I don’t. I want it to be predictable. And that is we, for that to happen, we need a better balance of supply and demand. And that is not where we’re at. We need more supply.
And so I hope I’m wrong about this, but I do think we’re going to see construction come down quite a bit in 2023. All right. That is it for my predictions for, or I guess they’re not my predictions, my reactions to Redfin’s predictions for 2023. Thank you so much for listening. If you liked this episode, please make sure to give us a review.
We really, really appreciate it on either Apple or Spotify or subscribe to our YouTube channel. It really helps us and supports us in making the show. If you have any thoughts or questions about my reactions or thoughts of your own hot takes on the 2023 housing market, feel free to go on the BiggerPockets forums, we have an On The Market forum there. Or you can hit me up on Instagram where I’m at the Data Deli.
Thanks again for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza and OnyxMedia. Research by Pooja Jindal. And a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.