Elevated levels of inflation and mortgage rates and high construction costs are projected to continue the housing recession into 2023 and push the overall economy into a mild recession during the calendar year. Despite current challenges with affordability and slowing sales rates, the second half of 2023 could be a “turning point” for both the housing market and overall economy, according to NAHB chief economist Robert Dietz.

“Our expectation is that in the first quarter and the second quarter of 2023, we are going to see GDP declines. They are the dividends of tightening monetary policy by the Federal Reserve. We [also] expect a rise in the unemployment rate [in 2023],” Dietz said during The Outlook: A Complete Guide to Housing Trends, Forecasts & Insights for 2023 session at the 2023 International Builders’ Show with Zonda chief economist Ali Wolf and Realtor.com chief economist Danielle Hale.

Dietz projected that with inflation showing signs of cooling, the Federal Reserve’s actions to raise interest rates should end in the first quarter of 2023 with a final rate hike in March. The NAHB projects the cumulative effect of the rate hikes will be a peak mortgage rate just above 7%. However, he said mortgage rates are expected to fall below 6% by 2024, setting the stage for a housing rebound in the second half of 2023 and 2024.

The NAHB projects single-family production will fall for the second consecutive year in 2023 to 744,000 units before rebounding to a 925,000 annual pace in 2024. The association is projecting multifamily starts will fall 28% in 2023 to a 391,000 total and will stabilize at an annual rate of 374,000 starts in 2024. While the single-family sector is projected to experience a downturn in 2023, the residential remodeling sector is projected to grow 5% on a nominal basis this year and 4% in 2024, according to Dietz.

Dietz said single-family home building is likely to lead the economic recovery in the second half of 2023 and 2024, spurred by falling interest rates. While demand is projected to return to the market, supply-side issues—such as lots, financing, and building material constraints—are projected to worsen. However, he said the housing deficit of 1.5 million homes, favorable buyer demographics, and the interest rate environment will likely contribute to a strong housing market after the mild recession of 2023.

Housing Market Outlook: New Homes

The current housing market is plagued by the affordability shock brought on by mortgage rates rising rapidly from 3% to 7% in 2022, Wolf told the audience. The increase in rates has translated to monthly payments that are 30% to 60% higher than the beginning of 2022, contributing to buyer uncertainty. However, the market is showing signs of stability, with mortgage rates averaging below 7% for 11 consecutive weeks, she said.

“The fact that [interest rates] have stabilized out is contributing to a boost in consumer confidence,” Wolf said.

Regionally, sales are slowing in Texas and Western metros more than markets in the Southeast, Midwest, and Northeast, according to Wolf. Many markets that grew the most during the pandemic—including Phoenix; Las Vegas; Riverside, California; Austin, Texas; and Denver—have also slowed the most in recent months. Wolf said in some Western markets, though, sales have begun to increase again, suggesting these markets have already hit the bottom.

According to Zonda data, the cancellation rate in December was 20%, double its pre-pandemic level but down from levels experienced in the latter months of 2022. The cancellation rate is much higher among entry-level buyers compared with other buyer cohorts, said Wolf. While cancellation rates are lower, only 10% of builders surveyed by Zonda indicated they would easily be able to resell a home after a cancellation. Approximately 45% of respondents said they were unable to easily sell homes without some adjustment in the form of incentives or price cuts.

Wolf said over 60% of builders continue to offer increasing incentives to prospective buyers and over 50% of all communities across the country are offering incentives. Interest rate buydowns are growing in popularity among prospective buyers to bring rates down to levels in the mid-4s and low-5s. She said many builders are implementing an approach of cutting prices, offering incentives, and covering closing costs to bring buyers off the sideline rather than make incremental price adjustments that may not incentivize sidelined buyers to consider home purchases.

While actions from builders can move some buyers off the sidelines, sales levels still remain low, and many builders are planning to scale back starts. Seven in 10 builders surveyed by Zonda said they plan to slow starts to realign with sales activity to find a market equilibrium.

Housing Market Outlook: Existing-Home Sales

Hale said there are signs that the market has at least reached a temporary bottom in sales activity. While existing-home sales continued to decline to end 2022, the rate of decline slowed and pending home sales increased in December, indicating existing-home sales may be close to reaching a bottom, she said.

“There are reasons to think that maybe housing activity on the sales side is finding a bottom,” said Hale, “which is roughly in line with what we expect for the year ahead. We think sales will decline for 2023 as a whole, but improve from the level we were seeing activity occur at in the fall.”

Existing-home inventory has benefited both from slower sales activity and time on the market, increasing 55% in 2022 compared with 2021. However, Hale said the inventory level in the existing market is well below pre-pandemic levels.

While existing inventory is higher on a year-over-year basis, Hale said this has not resulted in more sellers on the market. In December, the number of homeowners who put their home for sale was down 21% compared with 2021 and significantly below pre-pandemic levels. In addition to fewer sellers in the market, homeowners are still asking high list prices for homes that are put on the market. The average asking price for existing homes increased 8.4% on a year-over-year basis in December, according to Hale. However, she said homeowners are becoming more willing to cut prices to make a sale than in recent years.

“Home sellers are more than twice as likely as last year to make a price cut if needed,” Hale said. “It’s still not the majority of homeowners that are selling their home, but it is something we’re seeing become more common, especially in areas where we’ve seen inventory increase.”