Zillow’s forecast for 2023: It’s all about affordability 

After a couple years of rapidly rising home prices, affordability is squarely on the minds of buyers.

That was the key theme of Zillow's predictions for the coming year, and the company's economists acknowledged that finding an affordable monthly mortgage payment will be a top priority for buyers in 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 in a news release accompanying the findings. "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." 

How will buyers overcome affordability challenges in 2023? Looking to less expensive Midwestern markets and pooling money with family and friends are two ways buyers might stretch their dollars. Also forecasted by Zillow are improvements in affordability and more first-time landlords.

Midwest market could shine in 2023

While many pandemic boomtowns and expensive West Coast metros are seeing falling prices and a higher rate of delistings, Midwest markets are in relatively good shape during this slowdown.

Zillow noted that a typical monthly mortgage payment in Topeka, Kansas is $1,269, compared to $4,129 in Sacramento. Given the vast difference in affordability, some homebuyers, particularly those working remotely, may be tempted to forgo California sunshine and consider relocating to colder climates or less populated areas.

While it's expected to be a healthy, competitive market, the Midwest won't experience a boom in 2023, said Jeff Tucker, senior economist at Zillow.

"Steady growth with more sales activity than most of the country should be the expectation," Tucker said in an email.

More buyers will co-buy with friends or family

A Zillow survey earlier this year found that among successful homebuyers, 18% had purchased with a friend or relative who wasn't their spouse or partner. Given the rising cost of a mortgage, Zillow economists predict it will be even more common during the spring shopping season.

Tucker doesn't expect it to be a one-size-fits all approach; potential buyers are considering more options to make the numbers work.

"What's important to take away is that people want to own homes, but many need help to get across that threshold amid this affordability crisis," Tucker said. "Things like down payment assistance, co-signing a loan or getting help from family members can make a difference."

While buying a house with a friend introduces some challenges, there are also advantages. Along with more purchasing power, it can help buyers forgo the private mortgage insurance required for those who can't afford a 20% down payment.

The affordability crisis will stabilize

Zillow economists expect home values to remain relatively flat in 2023, with some markets experiencing decreases in values year-over-year. That could help out potential buyers, particularly if interest rates and inflation go down.

It's not clear, however, if that will happen. Realtor.com's economists are forecasting interest rates around 7.4% and single-digit growth in home prices in 2023. That won't help with affordability, even if wages rise in 2023.

What could help is inventory, and Zillow predicts new home construction will drive price reductions.

"The pace of starts is likely to decelerate next year, but builders have their hands full with a record number of units under construction, so we expect a large volume of completed units to keep hitting the market and leasing up," Tucker said. "The large number of millennials in their late 20s and early 30s now should keep housing demand from falling too much in the face of inflation, especially if the job market stays as strong as it has remained in late 2022."

Owners may become landlords

Homeowners are reluctant to sell in this market and give up their locked-in interest rates, particularly if they purchased a home when rates were half what they are now, which could prompt them to rent out their homes instead.

Zillow economists predict that owners who have to move, or who bought a second home while rates were low in 2020 and 2021, might decide to become first-time landlords in 2023. With rents expected to rise in 2023, it may become an attractive way to add income, particularly if the stock market remains sluggish.