The next few weeks will tell us where the market is headed in 2023 

For those wondering what the 2023 real estate market will look like, mortgage interest rates around mid-January may provide some clues. 

That's one of the insights that came out of the ATTOM/Altos Research 2023 Housing Market Outlook webinar held on Dec. 20. Checking up on mortgage rates in mid-January is important because that's when inventory starts climbing and potential buyers are resuming their search.

Buyers and sellers preparing for the busy spring season should have a better picture of the real estate market landscape in the coming weeks, and they will make decisions accordingly — but seeing where mortgage rates go next will be key, said Mike Simonsen, CEO of Altos.

"If in the first quarter rates drift down into the fives, we'll have both more transactions and flatter prices for the year," Simonsen said. "If we get rolling into January and February and rates have climbed… then we're going to have both fewer transactions and negative prices. Most of the action happens in the first and second quarter of the year, so you can plot out the rest of the year on that."

Completed sales will be off to a sluggish start in the new year, based on data showing that the number of pending transactions and loan applications at the end of 2022 were weak.

The main reason for the slow start in 2023? Affordability. ATTOM's fourth-quarter U.S. Home Affordability Report found median-priced single-family homes and condos are less affordable compared to historical averages in 99% of the counties analyzed, far above the 68% level in the fourth quarter of 2021.

The report also found the portion of average wages nationwide required for typical major homeownership expenses has risen to 32.3%. That's up from 23.8% a year ago and is at its highest point since 2007.

Don't rule out a recession

The overall outlook is a pullback in prices and sales. ATTOM's Rick Sharga said he expects prices to drop about 5% nationally, with some of the previous hot markets seeing double-digit declines. He also foresees a recession starting around the second quarter, because the Federal Reserve's aggressive monetary policy is probably overcorrecting as it tries to knock down the inflation rate. 

Even if a recession does occur, it should be short and mild because other aspects of the economy, including jobs and wages, remain strong.

Consumer sentiment may also play a role in a recession, Sharga said. Retail spending is relatively strong, but consumer confidence is low, leading to a situation where "we worry ourselves into a recession."

What will happen with inventory?

One of the paradoxes of the current real estate slowdown is inventory levels. Usually when home sales come to a screeching halt like they did this fall, inventory quickly grows. While inventory is currently up compared to last year's hot market, it is still well below pre-pandemic levels.

Inventory should start picking up next year, Simonsen said. He expects to see about 725,000 homes for sale by the end of 2023 — which is much higher than the current level of around 550,000 but only slightly below pre-pandemic levels.

Those in the best position in 2023 will be buyers who can make cash offers, Sharga said. Along with more inventory to choose from, they don't have to worry about high interest rates. There will also be less competition, giving them more leverage over sellers.