Home Prices Might Plunge in 2023. But Here's Why We Won't Have a Housing Market Crisis on Our Hands

Don't worry -- we're unlikely to have a repeat of 2008.

There's a reason it's been a major struggle for home buyers -- particularly first timers -- to break into the real estate market. Housing inventory has lacked in a serious way, and any time there's more demand than there is supply of a given commodity, its price has a tendency to rise. That explains why home prices have soared over the past couple of years -- and why homeowners and sellers don't need to worry so much about falling home prices in 2023.

We're not headed into another housing market crash

Some people hear the words "falling home prices" and immediately associate them with the housing market crash of 2008. Back then, countless U.S. homeowners wound up underwater on their mortgages (which happens when a home's value isn't high enough to pay off its mortgage balance) as housing prices plunged.

But while home prices could fall in 2023, that doesn't mean homeowners and potential sellers need to panic. For one thing, home prices aren't guaranteed to fall, and in late August, Goldman Sachs economists predicted that home prices will experience 0% growth in 2023. But 0% growth means just that -- no growth. It doesn't mean a plunge.

Now to be fair, Moody's Analytics has a different view. It expects home prices to drop about 5%. That's not the best news for sellers. But let's also remember that home prices are way up right now. So if they drop 5%, sellers might still manage to command prices that are higher than what their homes were worth in early 2020, before U.S. property values started soaring.

Also, a 5% drop in home values shouldn't create a scenario where millions of homeowners suddenly have negative equity. A big reason the 2008 housing crisis happened was that mortgage lenders gave out loans a lot more freely than they do today. Many buyers took on way too much house and fell behind on their payments at the same time, creating a surplus of inventory as they tried to unload those properties to no avail.

Now we talked about supply and demand earlier. When there's too much supply relative to demand, prices tend to fall.

But right now, the U.S. housing market has the opposite problem. There's still a notable lack of supply. And so even if buyer demand drops in 2023 due to factors like recession fears and expensive mortgage rates, it's unlikely to create a situation where home prices plunge due to there being excess supply. If anything, it might equalize the housing market so buyers and sellers are finally on equal footing.

Let's not blow things out of proportion

There is a chance that home prices will fall in 2023. But sellers shouldn't assume the worst in that regard, and many might still walk away with a nice profit.

That said, homeowners looking to borrow against the equity they have in their properties may want to do so sooner rather than later, before home values drop. But otherwise, falling home prices could be just the thing to settle the housing market down -- and give first-time buyers a fighting chance at snagging a place of their own.