It appears that the housing market will experience an interesting year in 2023, according to First American’s Deputy Chief Economist Odeta Kushi in her new blog post.

As Kushi notes, the housing market has experienced highs and lows since before the pandemic. In the midst of the pandemic, the role of a home changed, causing demand to surge, and price appreciation to reach new heights.

Both buyers and sellers fled the housing market during the second half of 2022 when the nominal interest rate was raised and the Federal Reserve tightened monetary policy.

The question Kushi raises is whether the recent housing freeze will continue into 2023 or whether it will start to thaw.

In her answer, Kushi says that the path of inflation and future monetary tightening will largely determine what the housing market looks like in 2023.

There is a strong likelihood that the Federal Reserve will pay attention to the dynamics of inflation in certain parts, which are currently declining. One of the last struggling components of the economy seems to be core services. While the Fed is expected to continue raising interest rates until the interest rate reaches a rate of 5-5.25%, employers are still looking for labor, pushing wages higher.

Treasury bonds, as well as mortgage rates, will be affected by all of these factors during the first half of the year.

Bad economic scenarios reflect stagnating inflation, or even rising inflation, which will push up mortgage rates and increase monetary pressure on the market. As a result, the market could be frozen by decreasing the supply of homes and sidelining the remaining buyers.

A better situation would be if inflation falls more than expected and there are no further interest rate hikes.

Whether and by how much mortgage rates will rise is the main trend to watch. The declines in home sales volume and prices will stabilize once mortgage rates peak. Whether inflation declines and what the Fed does in the coming months will determine how it proceeds.