The following analysis of select counties of the Western Washington real estate market is provided by Windermere Real Estate Chief Economist Matthew Gardner. We hope that this information may assist you with making better-informed real estate decisions. For further information about the housing market in your area, please don’t hesitate to contact your Windermere Real Estate agent.

Regional Economic Overview

Although the job market in Western Washington continues to grow, the pace has started to slow. The region added over 91,000 new jobs during the past year, but the 12-month growth rate is now below 100,000, a level we have not seen since the start of the post-COVID job recovery. That said, all but three counties have recovered completely from their pandemic job losses and total regional employment is up more than 52,000 jobs. The regional unemployment rate in November was 3.8%, which was marginally above the 3.7% level of a year ago. Many business owners across the country are pondering whether we are likely to enter a recession this year. As a result, it’s very possible that they will start to slow their expansion in anticipation of an economic contraction.

Western Washington Home Sales

❱ In the final quarter of 2022, 12,711 homes sold, representing a drop of 42% from the same period in 2021. Sales were 34.7% lower than in the third quarter of 2022.

❱ Listing activity rose in every market year over year but fell more than 26% compared to the third quarter, which is expected given the time of year.

❱ Home sales fell across the board relative to the fourth quarter of 2021 and the third quarter of 2022.

❱ Pending sales (demand) outpaced listings (supply) by a factor of 1:2. This was down from 1:6 in the third quarter. That ratio has been trending lower for the past year, which suggests that buyers are being more cautious and may be waiting for mortgage rates to drop.

Western Washington Home Prices

❱ Sale prices fell an average of 2% compared to the same period the year prior and were 6.1% lower than in the third quarter of 2022. The average sale price was $702,653.

❱ The median listing price in the fourth quarter of 2022 was 5% lower than in the third quarter. Only Skagit County experienced higher asking prices. Clearly, sellers are starting to be more realistic about the shift in the market.

❱ Even though the region saw aggregate prices fall, prices rose in six counties year over year.

❱ Much will be said about the drop in prices, but I am not overly concerned. Like most of the country, the Western Washington market went through a period of artificially low borrowing costs, which caused home values to soar. But now prices are trending back to more normalized levels, which I believe is a good thing.

Mortgage Rates

Rates rose dramatically in 2022, but I believe that they have now peaked. Mortgage rates are primarily based on the prices and yields of bonds, and while bonds take cues from several places, they are always impacted by inflation and the economy at large. If inflation continues to fall, as I expect it will, rates will continue to drop.

My current forecast is that mortgage rates will trend lower as we move through the year. While this may be good news for home buyers, rates will still be higher than they have become accustomed to. Even as the cost of borrowing falls, home prices in expensive markets such as Western Washington will probably fall a bit more to compensate for rates that will likely hold above 6% until early summer.

Western Washington Days on Market

❱ It took an average of 41 days for homes to sell in the fourth quarter of 2022. This was 17 more days than in the same quarter of 2021, and 16 days more than in the third quarter of 2022.

❱ King County was again the tightest market in Western Washington, with homes taking an average of 31 days to find a buyer.

❱ All counties contained in this report saw the average time on market rise from the same period a year ago.

❱ Year over year, the greatest increase in market time was Snohomish County, where it took an average of 23 more days to find a buyer. Compared to the third quarter of 2022, San Juan County saw average market time rise the most (from 34 to 74 days).

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.

Hello there, I’m Windermere’s Real Estate’s Chief Economist Matthew Gardner and welcome to the first episode of “Monday with Matthew” for 2023. As has become tradition, this first episode of the year will be dedicated to my real estate forecast for the U.S. housing market, so let’s get straight to it.

2023 Real Estate Forecast

Existing Home Sales & Forecast

U.S. home sales trended lower through all of 2022 and, although I believe that sales will still have held above five million, this certainly won’t be the case in 2023. Affordability and higher financing costs will continue to act as headwinds when it comes to sales, but I think that the bigger issue will be that listing activity will not rise significantly as we move through the year.

As I have been saying for several months now, I don’t see why many households who don’t have to move will move and lose the historically low interest rate that they currently benefit from. That said, sales will still occur this year but at just 4.8 million, sales will be lower than we have seen since 2014.

Annual Change in Median Sale Prices

Much has been said about the future of home prices, with some forecasters even suggesting that housing prices will collapse in a similar fashion to that seen following the bursting of the housing bubble back in 2008. Now, although price growth through the pandemic period was clearly excessive, fundamentally speaking, the two periods cannot be considered to be similar at all.

It’s my opinion that sale prices in 2023 will be very modestly lower than last year and I certainly don’t expect to see a collapse in home values.

But not all markets are created equal. The pandemic created what has become known as “Zoom-Towns.” These were cheap markets that affluent buyers flocked to because of their newly found ability to work from home and this led sale prices there to soar. It’s these locations that will likely see prices fall more significantly. Ultimately, expect to see prices fall through the first half of this year before starting to recover in the second half.

New Home Starts & Forecast (Single Family)

Looking now at the new construction market, housing starts fell last year as construction costs remained high and mortgage rates rose which lowered demand.  And I’m afraid that I do not see 2023 as being one where builders will deliver more inventory, with starts pulling back to a level the country hasn’t seen since 2016. That said, I am expecting a recovery in 2024 when new home starts will break back above the 1,000,000 level.

New Home Sales Forecast

New home sales in 2023 will fall further coming in below 600,000 but there is some light at the end of the tunnel with sales picking up fairly significantly again in 2024. We all understand that the country has a significant undersupply of ownership housing, but the costs associated with building new homes is still making it remarkably hard for builders even though they understand that demand will be significant for at least the next decade and a half given current demographics.

But the problem they will continue to face is that demand will primarily come from entry level buyers and, simply put, the cost to build a home precludes many developers from being able to meet this demand.

Average 30-Year Mortgage Rate & Forecast

And finally, my forecast for mortgage rates in 2023. Although this might not look good at all, as they say, “the devil is in the details.” Rates skyrocketed last year as the Fed stopped buying treasuries and mortgage-backed securities and, although they are off the highs we saw toward the end of last year, they are still significantly higher today than the market has become used to seeing.

As you can see here, I’m anticipating the average 30-year conventional rate to average 6.1% in 2023, but my forecast is actually a bit better than this shows.

Average 30-Year Mortgage Rate Forecast 2023

You see, my quarterly forecast suggests that rates have actually already peaked, and that they will trend lower as we move through this year and break below 6% by the fourth quarter. I would add that if anything my forecast may be a little pessimistic, and rates may end 2023 a little lower than I am showing here.

But that will depend on the Fed, and how long they will continue raising rates, and how long it will take before they start to lower them if the US enters a recession this year, which many forecasters including myself believe will be the case.

So, there you have it, my 2023 U.S. housing forecast. I will leave you with this one last thought. 2023 will be a transition year when the housing market will come off the “high” we saw during the pandemic and borrowing costs were artificially low.

I don’t see any reason for buyers or sellers to panic though. By the end of 2023, most markets will have corrected themselves and I believe we will see prices and demand start to pick up again toward the end of this year, but at a far more normalized pace.

As always, I look forward to your comments on my forecasts and I’ll see you all again next month. Take care now.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.

Matthew Gardner’s Top 10 Predictions for 2023

1. There Is No Housing Bubble

Mortgage rates rose steeply in 2022 which, when coupled with the massive run-up in home prices, has some suggesting that we are recreating the housing bubble of 2007. But that could not be further from the truth.

Over the past couple of years, home prices got ahead of themselves due to a perfect storm of massive pandemic-induced demand and historically low mortgage rates. While I expect year-over-year price declines in 2023, I don’t believe there will be a systemic drop in home values. Furthermore, as financing costs start to pull back in 2023, I expect that will allow prices to resume their long-term average pace of growth.

2. Mortgage Rates Will Drop

Mortgage rates started to skyrocket at the start of 2022 as the Federal Reserve announced their intent to address inflation. While the Fed doesn’t control mortgage rates, they can influence them, which we saw with the 30-year rate rising from 3.2% in early 2022 to over 7% by October.

Their efforts so far have yet to significantly reduce inflation, but they have increased the likelihood of a recession in 2023. Therefore, early in the year I expect the Fed to start pulling back from their aggressive policy stance, and this will allow rates to begin slowly stabilizing. Rates will remain above 6% until the fall of 2023 when they should dip into the high 5% range. While this is higher than we have become used to, it’s still more than 2% lower than the historic average.

3. Don’t Expect Inventory to Grow Significantly

Although inventory levels rose in 2022, they are still well below their long-term average. In 2023 I don’t expect a significant increase in the number of homes for sale, as many homeowners do not want to lose their low mortgage rate. In fact, I estimate that 25-30 million homeowners have mortgage rates around 3% or lower. Of course, homes will be listed for sale for the usual reasons of career changes, death, and divorce, but the 2023 market will not have the normal turnover in housing that we have seen in recent years.

4. No Buyer’s Market But a More Balanced One

With supply levels expected to remain well below normal, it’s unlikely that we will see a buyer’s market in 2023. A buyer’s market is usually defined as having more than six months of available inventory, and the last time we reached that level was in 2012 when we were recovering from the housing bubble. To get to six months of inventory, we would have to reach two million listings, which hasn’t happened since 2015. In addition, monthly sales would have to drop below 325,000, a number we haven’t seen in over a decade. While a buyer’s market in 2023 is unlikely, I do expect a return to a far more balanced one.

5. Sellers Will Have to Become More Realistic

We all know that home sellers have had the upper hand for several years, but those days are behind us. That said, while the market has slowed, there are still buyers out there. The difference now is that higher mortgage rates and lower affordability are limiting how much buyers can pay for a home. Because of this, I expect listing prices to pull back further in the coming year, which will make accurate pricing more important than ever when selling a home.

6. Workers Return to Work (Sort of)

The pandemic’s impact on where many people could work was profound, as it allowed buyers to look further away from their workplaces and into more affordable markets. Many businesses are still determining their long-term work-from-home policies, but in the coming year I expect there will be more clarity for workers. This could be the catalyst for those who have been waiting to buy until they know how often they’re expected to work at the office.

7. New Construction Activity Is Unlikely to Increase

Permits for new home construction are down by over 17% year over year, as are new home starts. I predict that builders will pull back further in 2023, with new starts coming in at a level we haven’t seen since before the pandemic.

Builders will start seeing some easing in the supply chain issues that hit them hard over the past two years, but development costs will still be high. Trying to balance homebuilding costs with what a consumer can pay (given higher mortgage rates) will likely lead builders to slow activity. This will actually support the resale market, as fewer new homes will increase the demand for existing homes.

8. Not All Markets Are Created Equal

Markets where home price growth rose the fastest in recent years are expected to experience a disproportionate swing to the downside. For example, markets in areas that had an influx of remote workers, who flocked to cheaper housing during the pandemic, will likely see prices fall by a greater percentage than other parts of the country. That said, even those markets will start to see prices stabilize by the end of 2023 and resume a more reasonable pace of price growth.

9. Affordability Will Continue to Be a Major Issue

In most markets, home prices will not increase in 2023, but any price drop will not be enough to make housing more affordable. And with mortgage rates remaining higher than they’ve been in over a decade, affordability will continue to be a problem in the coming year, which is a concerning outlook for first-time buyers.

Over the past two years, many renters have had aspirations of buying but the timing wasn’t quite right for them. With both prices and mortgage rates spiraling upward in 2022, it’s likely that many renters are now in a situation where the dream of homeownership has gone. That’s not to say they will never be able to buy a home, just that they may have to wait a lot longer than they had hoped.

10. Government Needs to Take Housing More Seriously

Over the past two years, the market has risen to such an extent that it has priced out millions of potential home buyers. With a wave of demand coming from Millennials and Gen Z, the pace of housing production must increase significantly, but many markets simply don’t have enough land to build on. This is why I expect more cities, counties, and states to start adjusting their land use policies to free up more land for housing.

But it’s not just land supply that can help. Elected officials can assist housing developers by utilizing Tax Increment Financing tools, whereby the government reimburses a private developer as incremental taxes are generated from housing development. There are many tools like this at the government’s disposal to help boost housing supply, and I sincerely hope that they start to take this critical issue more seriously.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.