2022 was somewhat of a mixed bag economically, including positives such as robust job market and the continued recovery from the COVID-19 pandemic, but also significant negatives such as rampant inflation to rapidly rising interest rates. The mixed nature of 2022 will likely persist into 2023. In a new report from LendingTree, Senior Economist Jacob Channel shared his predictions for the state of housing, jobs and the economy in 2023.
The report predicts that average interest rates on 30-year fixed mortgages will be between 5.5% and 6.5% when 2023 ends. Channel shared that the 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.
Home prices will fall between 5% and 10% nationally year-over-year, Channel predicts. While this drop may seem steep, Channel shared that 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.
The report also predicts that the unemployment rate will finish 2023 by rising above 4% due to layoffs and other cost-cutting measures. Even with rising unemployment Channel shared that the jobless rate rising to 4.5% or 5% would still be relatively low historically.
Channel predicted that YoY inflation growth will fall to between 3% and 4% by the end of 2023. He shared that 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. Additionally, the report predicts that the federal funds target rate will end up around 5%.
Potential economic upsides in 2023:
- Even if it does cool, the housing market likely won’t crash like in 2008. 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 this may be seen as a negative, there are upsides to it for many buyers and even sellers in the market. 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. 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. As major manufacturing nations like China reduce pandemic-related restrictions, Supply chain issues are poised to get better. 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, it will nonetheless be good news for those struggling to keep up with rising rates.
Potential economic downsides:
- 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.
With the given information, Channel stated that there are a few ways for yourself and to share with clients to ensure both your and their success in the coming year.
Channel said that “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,” concluded Channel.
For the full report, click here.