Zillow’s hot housing takes for 2023

The Midwest will move to the forefront as affordability remains housing's biggest issue

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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, Zillow economists predict. 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 heading into 2023.

“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,” said Zillow chief economist Skylar Olsen. “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.”

The Midwest to feature front and center in 2023

Unlike in nearly every other region of the United States, prices in most Midwest metro areas haven’t risen to outrageous extremes. Mortgage costs are still within reason compared with incomes across Missouri, Kansas, Iowa, Ohio and smaller metros in Illinois, which will allow first-time buyers to take the plunge. Lower rents and home prices in these areas, as well as in some Pennsylvania, New York and other Northeastern metros, make it easier to save up for a down payment. A typical mortgage payment in Topeka is $1,269, compared to $4,129 in Sacramento.

Having houses available to choose from is another key component of a healthy market, and the Midwest stands out. Inventory there isn’t in a massive hole compared to pre-pandemic times, and more homeowners are willing to list than elsewhere in the country, encouraged by more consistent demand from buyers.

Buying with friends and family will gain momentum

Soaring housing costs have been a popular topic of conversation in 2022, but buying a home with a friend or relative who isn’t a partner or spouse 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 homeownership are turning to unconventional means of making it pencil out financially, and this should increase in 2023.

A Zillow survey fielded this spring found that among recent successful home buyers, 18 percent had purchased with a friend or relative who wasn’t their spouse or partner. Of prospective home buyers, 19 percent intended to buy with a friend or relative in the next 12 months. Affordability and qualifying for a mortgage were cited as the top reasons for buying a home with someone else—both are challenges that are now even more acute. Mortgage payments for a typical U.S. home rose from requiring 27 percent of median household income in January to 37 percent in October—far beyond the 30 percent threshold at which housing becomes a financial burden.

As more millennials and now Generation Zers enter what will still be a historically expensive market in 2023, more folks are set to put “bestie” to the ultimate test.

Affordability crisis will stabilize

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 hang on to their current houses and their historically low mortgage rates. Rents have grown faster than wages, making it harder to save up for a down payment, and renters of color are more likely to have experienced rising rents for their units.

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 markets most challenged by affordability issues. Mortgage rates are seeing some recent and encouraging progress downward as inflation and labor market tightness show some small signs of easing. If we’ve actually turned the corner on inflation, that should continue.

Rent growth should move closer to historical norms next year, as well. Annual growth came down quickly from a massive peak of 17.1 percent in February to 9.6 percent by October. Rents fell during the month of October, the first time in two years, signaling a return to regular seasonal patterns.

New construction strength will be in rentals

Despite a pullback in permits and starts for single-family construction, the sheer number of houses currently under construction after the pandemic boom—still up 50 percent since February 2020—will mean continued rolling deliveries to the market. This temporary glut in available new homes will drive price reductions for new construction, and potentially in the existing home market, too, which otherwise will continue to experience low inventory.

In contrast, builders of multifamily units are feeling much more bullish. The number of multifamily units to start construction each month has increased steadily, rising 8 percent from pre-pandemic levels in October. Elevated multifamily permits 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 single-family homes, as many would-be homeowners will need to continue renting into later stages of life if they’re currently unable to qualify and move forward with a purchase of their own home.

We’ll see a surge in first-time landlords in 2023 

The record-low mortgage rates of 2020 and 2021 provided the leverage of a lifetime for investment in a second house. Vacation areas saw significant upticks in sales, and 34 percent of buyers surveyed by Zillow in 2021 said the opportunity to rent out their entire house was an important reason for buying it—up from 27 percent in 2018 and 28 percent in 2019.

With rent growth expected to rise faster than home values over the next year, many of these second homes have an even better potential to yield regular rental income above the mortgage payment fixed with record low rates. The potential for regular income, bearish expectations for stock markets in 2023, and the big pullback from home buyers due to higher mortgage rates may reinforce the incentive to hold onto those investment properties.

Similarly, more homeowners looking to move in 2023 might decide to keep and rent out their current house rather than sell it, to not give up a historically low mortgage rate and a potential income stream at a time when rents are high. Zillow Rental Manager allows landlords to post listings for free, collect payments, screen tenants, sign leases and more, on the web or in the app.