Zillow’s Predictions for the 2023 Housing Market

Zillow made a series of what it called “bold predictions” about housing markets for the coming year. Unlike the title, what the company suggested is a series of deductions, either from their own or more common data and also trends many in CRE have noticed.

First up, attention goes to the Midwest. The bet in 2021 had been for the South and West to be strongest in housing. As well as in virtually every other CRE product type, as hindsight of results and ongoing demographic shifts in population showed. Next year, attention will snap to the Midwest, only this time the biggest trend going is affordability.

“Unlike nearly every other region in the United States, prices in most Midwest metro areas haven’t run up to extremes,” Zillow wrote. “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.” Also, there’s more inventory in that area compared to other parts of the country.

Next, buying with friends and family — another implication of rising costs — will gain momentum. “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,” Zillow says. “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.”

In third place, the affordability crisis will stabilize. If nothing else, one would have to wonder how long it could continue to accelerate. Monthly mortgage payments have doubled since 2019 and average hourly wages are up 23% over the last five year, compared to 37% growth of rents over the same period. The company expects home values to remain relatively flat and rent growth should be closer to historical norms.

Zillow expects a surge in first-time landlords. “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,” the company wrote. “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.” If rents do grow faster than home values, then renting out properties should be an attractive option.

Finally, expect new construction to be in rentals. Purchasing has been down as prices and mortgage rates went up. But homebuilders had gone all in, with units under construction up 42% from October 2019. That’s a lot of properties that will be on the market longer than developers would like, and they’re already pulling back. Multifamily, on the other hand, continues to see increasing construction, including build-to-rent units, because if people can’t afford to buy homes, they’ll have to live somewhere.