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If “hot” was the overused word to describe the U.S. housing market in 2021, then lukewarm to outright freezing might best describe how the market fared overall this year. 

The pandemic housing market boom, which saw home prices go up by 40% over a two-year period, began slowing down in the second half of the year as mortgage rates doubled compared to the beginning of the year.  

As the Federal Reserve sought to tamp down decades-high inflation with rate hikes throughout the year, rising mortgage rates contributed to the growing mismatched expectations between buyers and sellers. Homes sat on the market for months as sellers continued to price homes at rates buyers could no longer afford. Contracts were cancelled, asking prices were slashed and inventory levels dropped.

After crossing 7% in October, mortgage rates have been falling steadily over the last four weeks, which could offer some relief to buyers but might not offset still-high asking prices.

So, what’s ahead for the housing market in 2023? We spoke to six experts for their predictions.

The Federal Reserve and mortgage rates

The Fed raised its key short-term interest rate by half a percentage point Wednesday, a smaller hike than its previous four, as inflation showed signs of easing.

The Fed also indicated that the economy would be grappling with slower growth, higher unemployment, and higher inflation in 2023.

Weaker growth typically leads to lower long-term interest rates, including mortgage rates, says Mike Fratantoni, chief economist for the Mortgage Bankers Association.

 “The housing market has certainly welcomed the recent decline in mortgage rates,” he said. “This decline is reflecting market expectations of being near the peak for short-term rates, as well as increased signs that the U.S. is headed for a recession next year.”

Innovations in mortgage finance

Housing finance has reached an inflection point, says Janneke Ratcliffe, vice president, Housing Finance Policy Center at the Urban Institute.

She expects to see innovation to accelerate with lenders, startups, advocates, researchers, and policymakers actively pushing the envelope around what’s possible in mortgage finance.