Home Prices Might Drop for This Reason in 2023 -- and It's Not a Good One

It's a scenario you really shouldn't hope for -- even if you're eager to buy.

There's a reason buying a home has been such a struggle over the past year. Home prices are up on a national level. And mortgage rates are also up this year. When we combine both factors, it creates a real problem with affordability. 

Now, there's a chance home prices will drop in 2023 to a notable degree. This doesn't mean we're in for a housing market crash. That's pretty unlikely due to the high level of equity so many owners have in their homes right now. But home prices could be driven downward if a recession hits in 2023. And while buyers would no doubt love to see a decline in property values, they shouldn't hope for a recession just to achieve that outcome.

A recession could produce a world of pain

The reason home prices are up so much right now is that there are more people who want to buy homes than there are available homes. It's your classic disconnect between supply and demand, and it explains why just about everything is more expensive right now -- not just homes, but also, food, cars, and so forth. 

If housing inventory were to pick up in 2023, it would likely drive home prices down. But the real estate market has been sorely lacking inventory for years, so we shouldn't necessarily expect a huge increase in near-term housing supply. Instead, what might happen is that home prices come down in 2023 due to a drop in buyer demand. And a recession might fuel that.

Financial experts have been worried about a recession for months. The fear is that interest rate hikes on the part of the Federal Reserve will cause a pullback in consumer spending due to the high cost of borrowing. If consumer spending declines a lot, it could fuel a recession.

So far, consumer spending hasn't shrunk. But some experts believe the reason is that consumers are sitting on leftover stimulus funds they have access to. Once that money runs out, consumer spending levels could fall, leading to a recession.

Meanwhile, if a recession hits, it could result in widespread unemployment. And that could push more buyers out of the market, thereby narrowing the gap between supply and demand even if real estate inventory holds steady. 

Of course, on the one hand, that could end up being a good thing for buyers who are able to move forward with a home purchase -- because less competition is clearly desirable. But a recession could have broad financial consequences -- negative ones that trickle down in different ways. And so as desperate as some buyers might be to finally purchase a home, a 2023 recession is something no one should wish for. 

Prepare for home prices to drop -- a little

There's a good chance home prices will drop naturally and gradually in 2023 even if a recession doesn't strike. That could give buyers some relief -- maybe not a ton, but some. 

However, there's a chance we'll manage to avoid a recession, and that means home prices may not budge all that much. That's something buyers will need to prepare for. 

All told, buying a home is likely to still be expensive in 2023. Those moving forward with home-buying plans will need to make sure they can swing a mortgage loan given today's housing prices and borrowing rates.