What to Expect From Housing and the Economy in 2023

The year 2022 was somewhat of a mixed bag economically. Positives worth celebrating included the nation’s robust job market and the continued recovery from the COVID-19 pandemic. But there were significant negatives, from rampant inflation to rapidly rising interest rates.

The mixed nature of 2022 will likely persist into 2023, with some economic prospects likely to improve, while others could worsen. Here are the LendingTree predictions for the state of housing, jobs and the economy in 2023.

2023 housing and economic predictions

Average interest rates on 30-year fixed mortgages will be between 5.5% and 6.5% when 2023 ends

Given mortgage rates’ volatility in 2022, it’s impossible to say with total certainty where they’ll land when 2023 ends. After peaking at 7.08% in the second week of November, the average rate for 30-year fixed mortgages fell to 6.42% by the end of December, owing to good inflation news.

If inflation news remains good, rates over the coming year will likely stabilize near where they were at the end of 2022, or even continue to fall. That said, borrowers shouldn’t expect rates to fall to anywhere near their record 2021 lows, or even as low as at the start of 2022, when the average rates for 30-year fixed mortgages were 2.65% and 3.22%, respectively.

Home prices will fall between 5% and 10% nationally year over year

Home prices won’t necessarily fall everywhere, but a combination of relatively high rates and weak homebuyer demand will likely push down prices nationwide in 2023.

While a 5% to 10% drop may seem steep, declines this year are unlikely to wipe out the home price gains many houses saw over the past few years. For example, according to the S&P/Case-Shiller U.S National Home Price Index, home prices increased by 11.33% from January 2020 to January 2021 and 19.25% from January 2021 to January 2022. Though home price growth has since decelerated, prices rose by 10.65% year over year in September 2022.

Owing to these gains, price drops of 5% to 10% would still leave the housing market much pricier than before the pandemic.

The unemployment rate will finish 2023 by rising above 4%

Over the coming months, businesses will likely continue layoffs and other cost-cutting measures that’ll push unemployment above its current 3.7% level (as of November 2022). Rising unemployment may seem scary — especially since it means some people will lose their jobs — but the jobless rate rising to 4.5% or 5% would still be relatively low historically.

Year-over-year inflation growth will fall to between 3% and 4% by the end of 2023

Diminished demand resulting from the Federal Reserve’s rate policies, higher unemployment and improvements to global supply chains should help bring down inflation as the year progresses.

While inflation appears poised to remain above the Fed’s ongoing target of 2% growth this year, consumers should feel relief compared to what they saw in 2022. Last year, the year-over-year growth in the personal consumption expenditures (PCE) index each month was commonly more than 6%. (The Fed’s preferred measure of inflation is the PCE index.)

The federal funds target rate will end up around 5%

The current federal funds target rate is 4.25% to 4.50%, and we’ll likely see a few more rate hikes over the coming months. But, assuming inflation shows sustained moderation, the Fed will likely stop raising its target rate before too long.

Importantly, this doesn’t mean the Fed will cut rates — just that they’ll stop announcing new hikes.

Potential economic upsides in 2023

• Even if it does cool, the housing market likely won’t crash like in 2008. While the housing market looks to be softening as buyer demand dissipates, it still doesn’t seem as though we’re likely to see a 2008-style crash in 2023 — even if 41% of Americans expect a crash this year. Owing to how strong many of the housing market’s fundamentals have remained — like borrowers’ ability to make their payments on time — the housing market (even in the face of high inflation) doesn’t appear at serious risk of a total meltdown.
• Home price growth will moderate, and even come down in some areas. Though declines in home prices are often seen as more of a negative than a positive, declines this year may not be all bad news. This is especially true for buyers who may be struggling to keep up with persistently high prices. For those worried about price declines, it’s worth noting that because home values have increased so much over the past few years, current homeowners will likely be able to hold onto most of the home equity they’ve built, even if prices come down.
• Inflation will likely come down. Inflation remained persistently high through 2022, much to the dismay of economic policymakers and consumers alike. There does seem to be some evidence that inflation has just about peaked and could soon start slowing down more significantly — at least in the U.S. Even though inflation will likely remain somewhat elevated in 2023, it shouldn’t be as bad as in 2022.
• Supply chains should improve. In 2023, supply chain issues are poised to get better, especially as major manufacturing nations like China reduce pandemic-related restrictions. This doesn’t mean supply chains will return to how they were before the pandemic, but it suggests that transporting raw materials and goods will be less of a challenge in many instances.
• Interest rate growth should moderate. The Fed will likely continue to hike rates over the coming months. But if inflation starts to wane, we could see an end to the aggressive rate-hike policies implemented through much of 2022. While this doesn’t necessarily mean rates will come down — barring a major recession, the Fed is unlikely to start reducing rates even if they stop hiking them — it will nonetheless be good news for those struggling to keep up with rising rates. Of course, rates could come down on some products not directly tied to the federal funds rate, like mortgages.

Potential economic downsides in 2023

• A recession could be on the horizon. Owing to various factors from a softening labor market to the Fed’s aggressive rate strategy, a recession hitting sometime in 2023 or early 2024 is a real possibility. However, a recession isn’t the end of the world. If one does hit, it’ll likely be mild.
• The housing market will remain prohibitively expensive for many. Even though home prices seem like they’re going to come down in 2023, or — at the very least — stop rising, that doesn’t mean housing will become affordable for everyone. Especially for lower-income borrowers, the housing market will likely remain a tough nut to crack for quite some time.
• Home sellers could face challenges. In 2020, 2021 and even earlier parts of 2022, sellers enjoyed a significant amount of leeway in the market. This trend already started to reverse in the latter half of 2022 and will likely continue into 2023. While this could be seen as good news for some buyers, it’ll likely be less than ideal for sellers who may find their homes are taking longer to sell and need to make more concessions to buyers than they’d prefer.
• The labor market will soften. Though unemployment remains low, there are signs the labor market is softening. As the year continues, though, it’s likely that more people will be laid off and the unemployment rate will increase.

How consumers could set themselves up for success in 2023

Based on our predictions for the year ahead, most people don’t need to worry about the sky falling. But there are things to consider or keep an eye on as the year progresses.

• Don’t be afraid to fight for your finances. While it may be harder to negotiate something like a raise at your job as the economy slows, you should never stop advocating for yourself. The more you can get from an employer, the easier it will be to save. The more you save, the easier it’ll likely be to weather an economic downturn. Even if you can’t negotiate a raise, fighting to strengthen your finances in whatever way you can — from cutting back on eating out to buying a less expensive car — can help you better prepare for what the future might bring.
• Be prepared for change. Though the economy may be less volatile this year than it was over the height of the pandemic, that doesn’t mean everything will be perfectly stable. Owing to this, people should be prepared to react quickly to sudden changes in places like the housing or jobs market. This could mean trying to set aside more money in case you’re laid off or being ready to quickly snatch up a good deal on a home that just hit the market. While we can make good guesses about where the economy may head this year, nobody can predict the future. As a result, everyone should do their best to roll with any punches they’re dealt.
• Don’t panic. It might be scary hearing about an impending economic downturn or uncertainty around the broader economic picture. But it’s always worth remembering that even if the economy turns sour, you’ll probably be OK in the long run. One of the worst things you can do when faced with uncertainty is panic. Doing so can lead you to make foolish decisions like paying too much for a home or dumping all your long-term stocks. Generally, the more level-headed you are, the better off you’ll be.