A year of declines: Redfin sees prices, sales and mortgage rates falling in 2023 

Mortgage rates will drop below 6%. Home prices will post a year-over-year decline for the first time in a decade. And the number of home sales will fall to their lowest level since 2011.

Redfin's economists have peered into their crystal ball and foresee a challenging real estate market for agents and brokers in 2023. Their 12 predictions cover a range of issues that impact the residential real estate industry, including the effects of climate change on housing, migration patterns of U.S. workers, the costs of homeownership and broker commissions.

Prediction No. 1: Home sales will decline

"We expect home sales to sink to their lowest level in more than a decade in 2023 as high mortgage rates keep housing costs up and prevent people from moving," wrote Deputy Chief Economist Taylor Marr. 

Inflation, higher interest rates and housing costs that remain stubbornly high despite a cooling market will cause prospective buyers to hit the pause button on real estate transactions. The result: Up to 16% fewer home sales next year over 2022, according to Redfin's predictions. 

Prediction No. 2: Lower mortgage rates

Redfin believes that the Fed's efforts to rein in inflation will bring down the costs to borrow money to buy a home — but a variety of factors will affect how quickly mortgage rates drop.

"We expect 30-year fixed mortgage rates to gradually decline to around 5.8% by the end of the year, with the average 2023 homebuyer's rate sitting at about 6.1%," wrote Marr. In November, the average 30-year rate ranged from about 6.5% to just over 7%, according to Freddie Mac.

If Redfin is correct in its predictions, a homebuyer with a 5.8% rate — vs. 6.5% — could save $150 a month on their mortgage payment for a $400,000 home.

Prediction No. 3: Home prices will drop 

Rounding out Redfin's top three predictions is an expectation that home prices will fall about 4% year-over-year. 

The decline, say Redfin economists, will start in the first quarter of 2023 with an estimated 2% drop from the previous year. If their forecast bears out, it will be the first year-over-year drop in home prices since 2012.

Redfin predicts the decline to continue in the second quarter with a drop of about 5% year-over-year, and then lessen by the end of the year as more favorable home prices bring consumers back to the market.

Here are the rest of the predictions:

No. 4: The housing markets in the Northeast and Midwest will perform better than the rest of the U.S., including the West Coast where the cost of housing has been high, and the Southeast which has been overheated.

No. 5: Rents will decline, with Redfin noting that the cost to rent has already declined in 11 major metropolitan areas. Higher mortgage rates and low for-sale inventory are keeping more people renting, the report says.

No. 6: Builders will continue to focus more on rental properties rather than single-family homes. The report notes that builders still have an inventory of new homes to sell after the building boom that took place during the pandemic.

No. 7: Investor activity in the marketplace will decline but start to pick up again later in the year. Smaller investors may pause investing or leave the market entirely, the report said.

No. 8: With more options for remote work, younger adults will seek out less expensive "mid-tier" cities to live in, from Savannah, GA, to Tucson, AZ.

No. 9: People will be less inclined to move. Relocations will slow by about 24% year over year, the report says, noting that migration will still be above pre-pandemic levels. 

No. 10: The costs to live in "climate risky areas" will continue to climb, with insurance the driving factor. High-risk areas include coastal Florida, prone to flooding from storms, and the hills of California, at risk of wildfires caused by drought conditions.

No. 11: More U.S. cities and states will modify single-family-only zoning rules to allow for more affordable townhomes, condos and apartment buildings. 

No. 12: Commission for buyers' agents may improve. While buyer agent commissions had fallen to 2.63% of the home sales price in 2022, lower home prices and sales will "prop up" commissions in 2023, the report predicts.