The listings giant predicts a surge of interest in Midwest markets and a new crop of first-time landlords among other items.

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Zillow economists shared their predictions for the 2023 housing market as the market appears firmly shifted into one marked by interest rates and inflation.

The listings portal giant predicts that consumers will have to continue shifting along with the market as housing costs remain high and that new markets — such as the affordable Midwest — will emerge as new hotspots as Americans seek to make their dollars go further. And more Americans will become first-time landlords as the demand for rentals grows stronger than the demand for mortgages in some markets.

“Americans finding ways to make payments on a roof over their heads is going to drive the market next year,” Zillow Chief Economist Skylar Olsen said in a statement. “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. 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.”

Bet on the Midwest

While 2021 and early 2022 saw the Sun Belt take center stage,  housing prices in many of those cities, such as Phoenix, Miami and Tampa have become unsustainable for many. Meanwhile, the Midwest remains essentially the last region of the country where prices haven’t reached extreme highs, with a typical monthly mortgage payment in Topeka at $1,269 compared to $4129 in Sacramento, Zillow pointed out.

The Midwest also stands out as a healthier market due to its high level of inventory, and homeowners are still willing to list their homes due to consistent demand from the buyers, the report posits.

The rise of co-ownership

With many would-be buyers locked out of homeownership by high mortgage costs, more and more people will turn to buying with friends and family, Zillow predicted, citing a survey the firm conducted this Spring that found 18 percent of recent successful homebuyers had purchased the homes with a friend or relative who wasn’t their spouse or partner, with affordability and the difficulty of qualifying for a mortgage cited as the top reasons for co-purchasing.

Mortgage payments for a typical U.S. home rose from requiring 27 percent of median household income in January to 37 percent in October — well above the 30 percent threshold at which economists consider housing a financial burden.

A shift toward rentals 

With high borrowing costs pushing homeownership out of reach for more and more Americans, demand will continue to increase in the rental market, Zillow predicts. This will likely manifest in new construction shifting toward more multifamily rentals and more homeowners becoming first-time landlords.

Developers of single-family homes are expecting price reductions due to a glut of newly constructed houses during the COVID-19 pandemic building boom, while multifamily developers are feeling bolder with the number of multifamily units to start construction increasing 8 percent from pre-pandemic levels in October, according to the U.S. Census Bureau. The rise in multifamily permits points to a vote of confidence for rental demand, Zillow economists said, and suggests that construction of build-for-rent single-family homes may also rise as more Americans rent into the later stages of their lives.

Additionally, following the record low mortgage rates of 2020 and 2021 that provided many Americans with the ability to purchase a second home for investment or vacation, Zillow predicts many vacation homeowners may seize the opportunity to rent out their vacation homes long-term as rent growth is expected to outpace home value growth.

Many homeowners looking to move may also instead choose to keep and rent out their current homes instead of giving up the record-low mortgage rates they already have locked in, Zillow predicted.

Email Ben Verde

Zillow
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