5 hot housing trends for 2023, according to Zillow

Midwestern markets will heat up, and more friends and family will pool their money to buy homes together in 2023 as people look for new ways to overcome the housing affordability crisis. However, this crisis will stabilize—if not improve—from the peak of the pandemic era, Zillow economists predict. New construction will focus on rental units, and we should see a jump in first-time homeowners. These are among a slew of new predictions and housing trends for 2023 that Zillow's economic research team made ahead of the new year.

"Americans who find ways to make payments on a roof over their heads will lead the market next year. When costs are lower, we will see healthier sales and inventory levels. If the rent is cheaper than a new mortgage, we will see increased demand for rentals - something that builders and landlords understand," said Zillow Chief Economist Skyler Olsen. "Affordability will be the biggest factor in housing for 2023, but there is room for optimism on this front if mortgage rates decline."

The Midwest will be front and center in 2023

Unlike almost every other region of the United States, prices in most Midwestern metro areas have not risen to outrageous extremes. Mortgage costs are still reasonable compared to incomes across Missouri, Kansas, Iowa, Ohio and smaller metro areas in Illinois, allowing first-time buyers to make the move. Lower rents and home prices in these areas, as well as parts of Pennsylvania, New York and other northeastern metros, make it easy to save for a down payment. A typical mortgage payment1 in Topeka is $1,269, compared to $4,129 in Sacramento.
Having available homes to choose from is another key component of a healthy market, and the Midwest stands out. The inventory there is not in a huge hole compared to the times before the pandemic, and more homeowners are willing to sell than elsewhere in the country, encouraged by more consistent demand from buyers.

Shopping with friends and family will gain momentum

Rising housing costs were a popular topic of conversation in 2022, but buying a home with a friend or relative who isn't a partner or partner turned out to be more than idle chatter for a surprising number of people. With housing costs rising well beyond previous norms of affordability, those chasing home ownership are turning to unconventional means of financial scaremongering, and that's set to increase in 2023.
A Zillow survey conducted this spring found that among recent successful homebuyers, 18% purchased with a friend or relative who was not their spouse or partner. Among potential home buyers, 19% intended to buy with a friend or relative in the next 12 months. Affordability and eligibility for a mortgage were cited as the main reasons for buying a home with someone else - both challenges that are now even more acute. Mortgage payments for a typical house in the US rose from a requirement of 27% of the median household income in January to 37% in October - well beyond the 30% threshold at which housing becomes a financial burden.
As more millennials and now baby boomers enter what will still be a historically expensive market in 2023, more people are going to put the "bestie" to the ultimate test.

A crisis of affordability will stabilize

Monthly mortgage costs have doubled since 2019, driven by price increases from the pandemic period, and to an even greater extent, by a rapid increase in mortgage rates this year. High mortgage rates are not only pushing buyers to the margins, they are also gathering new inventory as homeowners hold on to their current homes and their historically low mortgage rates. Rents have grown faster than wages, making it harder to save for a down payment, and renters of color are more likely to experience rent increases for their units.
Affordability will continue to be the driving force in the housing market in 2023, but there is a good chance it will improve. At the very least, the market should stabilize, and allow households to budget and plan housing decisions that will come in the months and years ahead.
Zillow expects national home values ​​to remain relatively flat next year, even falling in the most challenged markets due to affordability issues. Mortgage rates are seeing some recent and encouraging downward progress as inflation and labor market persistence show some small signs of easing. If we have really turned the corner on inflation, it should continue.
Rent growth should approach historical norms next year as well. Annual growth fell rapidly from a massive peak of 17.1% in February to 9.6% in October. Rents fell during October for the first time in two years, marking a return to regular seasonal patterns.

The new construction strength will be in rentals

Despite a pullback in permits and single-family construction starts, the sheer number of homes now being built after the pandemic boom – still up 50% since February 2020 – means continued rolling shipments to market. This temporary glut in available new homes will drive down prices for new construction, and possibly also in the existing housing market, which would otherwise continue to experience low inventory.
By contrast, multifamily unit builders feel much more bullish. The number of multifamily units starting construction each month has been steadily increasing, up 8% from pre-pandemic levels in October. Increased multifamily licensing approvals indicate a strong vote of confidence in continued demand for rental units, despite looming recession fears. This security will also encourage further construction of detached houses for rent, as many homeowners will need to continue renting later in life if they are not currently able to qualify and move forward with their own home purchase.

We will see an increase in the number of first home owners in 2023

The lowest mortgage rates of 2020 and 2021 provided the leverage of a lifetime to invest in a second home. Resort areas have seen significant increases in sales, and 34% of buyers surveyed by Zillow in 2021 said the opportunity to rent out their entire home was an important reason for buying it – up from 27% in 2018 and 28% in 2019.
With rent growth expected to rise faster than home values ​​over the next year, many of these second homes have even better potential to generate regular rental income above the fixed mortgage payment at record low rates. The potential for regular income, bearish expectations for stock markets in 2023 and the large retreat of homebuyers due to higher mortgage rates may strengthen the incentive to hold those investment properties.
Similarly, more homeowners looking to move in 2023 may decide to keep and rent out their current home rather than sell it, so as not to give up a historically low mortgage rate and a potential income stream at a time when rents are high.