Midwestern markets are poised for a strong 2023 and the housing affordability crisis will begin to stabilize in the coming calendar year, according to projections from Zillow economists. Zillow chief economist Skylar Olsen says areas where costs are lower will see healthier sales and inventory levels in the coming year and that “there’s room for optimism” on affordability because of expectations of receding mortgage rates.
While many regions in the United States have experienced high levels of home price appreciation, prices in many Midwestern metros have not risen to “outrageous extremes,” according to Zillow. Mortgage costs are relatively affordable compared with incomes in Missouri, Kansas, Iowa, Ohio, and smaller metros in Illinois. During Zonda’s recent National Housing Market Update webinar, chief economist Ali Wolf highlighted how several Midwest metros, including Columbus, Ohio, and Indianapolis, have experienced home price appreciation in line with income growth, making the markets more affordable than several West Coast metros, where home price appreciation has far exceeded levels of affordability supported by income levels. The relative affordability of Midwestern markets continues to make it appealing for relocation buyers in nearby regions, according to Wolf.
“While [the Midwest] has gotten a little bit more expensive relative to itself, even people in the northern part of the Southeast region are thinking about moving to the Midwest region because of the value [proposition],” Wolf said on a Zonda webinar.
Additionally, housing inventory in the Midwest is not at a massive deficit relative to pre-pandemic times, according to Zillow. According to Zonda, many Midwestern markets are experiencing sales rates either flat or above 2019 levels, and high levels of spec building in the region have promoted quick move-ins (QMIs), or homes that can be occupied within 90 days. According to Zonda’s recently released New Home Market Update for October, Cincinnati experienced the largest year-over-year increase in QMIs with 768% growth. QMIs in Cincinnati are 95% above pre-pandemic 2019 levels.
Zillow economists forecast that housing affordability, which has worsened due to rising mortgage rates, low levels of resale inventory, and home price appreciation, will stabilize, and possibly improve, in 2023. Zillow forecasts national home values will remain “relatively flat” in 2023 and fall in some markets most challenged by affordability issues. Zonda forecasts home prices may decline in 2023, falling by 15% on a national basis.
“We should see home price declines not only for market dynamics, but it will also help the market get back in line with something that’s more healthy and more reasonable,” Wolf said when providing an economic outlook for 2023. “Even big drops in home prices, because we had such a run-up of home prices during such a short period of time, are not as impactful in terms of causing a massive housing collapse, as what we saw during the last cycle.”
In addition to cooling home prices, Zillow projects downward pressure on mortgage rates due to easing inflation and labor market tightness will positively benefit overall affordability. Zonda, which is forecasting a mild recession in 2023, suggests mortgage rates may take more time to adjust following an economic slowdown. When evaluating previous recessions, mortgage rates have historically been stickier than the Federal Funds Rate, with an average decline of about 100 basis points after 18 months, according to an analysis by Zonda.
Zillow projects prospective homeowners sidelined by high costs may turn to unconventional methods, such as purchasing with a friend or relative, in 2023 to achieve homeownership. According to a Zillow survey from the spring, 19% of prospective home buyers intended to buy with a friend or relative in the next 12 months, due to affordability and qualification concerns.
While an increase in for-sale, single-family construction will likely mean more inventory in the market, Zillow is forecasting new construction strength in 2023 will be in the rental market. Elevated multifamily permits point to rental strength in the coming year, and Zillow economists forecast overall confidence in the rental market will encourage the construction of more build-to-rent single-family homes.