Will the Housing Market Crash in 2023?

It's a concern for sure -- but necessarily a spot-on one.

"Gear up for a recession in 2023." That's the message the media seems intent on conveying, and understandably so.

For months on end, a lot of big names in the financial world have been warning of a recession in the new year. These experts are convinced that aggressive rate hikes on the part of the Federal Reserve will cause consumer spending to decline dramatically, thereby leading to a broad economic downturn and spurring a wave of unemployment.

If a recession does hit, it could have a significant impact on the housing market. Buyers might pull out of the market for fear of losing their jobs or not wanting to take on the expense of homeownership at a time when things are so precarious. Plus, mortgage rates are high right now, and they're likely to stay that way going into 2023. So that alone might push more buyers out of the market.

As such, it's easy to see why some homeowners and potential sellers are worried about a real estate market crash in the new year. But are those fears valid?

Why things probably won't be so bad

Is it possible that home prices will start to drop in 2023? Absolutely.

The main reason housing prices are so elevated right now is that there's not enough real estate supply to meet buyer demand. But if buyer demand declines next year due to recession concerns (or an actual recession) and higher borrowing costs, it could lead to lower property values.

But there's a big difference between a drop in home prices and a full-blown housing market crash. And while the former is a strong possibility, the latter is less likely for one big reason -- there's a lot of "down" to go.

Right now, home prices are very elevated compared to where they were a year or two ago. If home prices decline 10% or 15%, it won't necessarily create a national crisis where millions of homeowners are underwater on their mortgages (which happens when a home loan balance exceeds the value of the home being financed). Rather, it just may be the case that sellers can no longer walk away with the massive profits they'd be looking at today.

To put it another way, a given home that may have been worth $300,000 at the start of 2020 may now be worth $345,000. If the value of that home drops to $315,000 in 2023, that doesn't mean its value has crashed -- it just means it's lower than it was at its peak.

Prepare for lower home values

While the housing market is unlikely to crash in 2023, sellers should expect property values to creep downward. And so those interested in finding a buyer should get moving with a listing sooner rather than later.

The upside of selling a home right now is that there's not a lot of competition, and we're not in a recession yet. In fact, the labor market is still quite strong. Listing a home now means getting ahead of a possible housing market decline.

Plus, some people may have the goal of becoming homeowners before the new year arrives. So it's a good time to put a home up on the market despite the fact that colder weather is around the corner.