The COVID-19 pandemic brought about a boom in housing markets, as more workers were working from home and moving out of metro areas. From 2020 to 2022, home prices rose 40%.

As decades-high inflation took over the market in 2022, the Federal Reserve implemented aggressive interest rate hikes, which trickled down to mortgage rates.

Now, the projected hottest markets of 2023 are based more on domestic industries in midsize metro areas, especially across the south and midwest.

According to the Zillow real-estate forecast, these areas are anticipated to attract more first-time home buyers in the next year because of affordability.

The 10 Hottest Housing Markets in 2023 

The Realtor.com economic research team identified the 10 hottest metropolitan areas where housing sales and prices are forecasted to continue rising in the new year. 

These metrics are based on affordability, employment opportunities, economic conditions, migration trends and recent price trends. 

1. Hartford, Connecticut

• Median home price in November 2022: $372,400
• Forecasted price growth in 2023: +8.5% 
• Forecasted sales growth in 2023: +6.5%

2. El Paso, Texas 

• Median home price in November 2022: $291,000
• Forecasted price growth in 2023: +5.4%
• Forecasted sales growth in 2023: +8.9% 

3. Louisville, Kentucky 

• Median home price in November 2022: $290,000 
• Forecasted price growth in 2023: +8.4%
• Forecasted sales growth in 2023: +5.2%

4. Worcester, Massachusetts

• Median home price in November 2022: $447,000
• Forecasted price growth in 2023: +10.6%
• Forecasted sales growth in 2023: +2.5%

5. Buffalo-Cheektowaga, New York 

• Median home price in November 2022: $240,000
• Forecasted price growth in 2023: +6.0%
• Forecasted sales growth in 2023: +6.3%

6. Augusta, Georgia-South Carolina 

• Median home price in November 2022: $319,000
• Forecasted price growth in 2023: +5.7%
• Forecasted sales growth in 2023: +6.2%

7. Grand Rapids-City of Wyoming, Michigan 

• Median home price in November 2022: $358,000
• Forecasted price growth in 2023: +10.0%
• Forecasted sales growth in 2023: +1.6%

8. Columbia, South Carolina 

• Median home price in November 2022: $300,000
• Forecasted price growth in 2023: +3.6%
• Forecasted sales growth in 2023: +7.7%

9. Chattanooga, Tennessee-Georgia 

• Median home price in November 2022: $397,000
• Forecasted price growth in 2023: +8.2%
• Forecasted sales growth in 2023: +2.9%

10. Toledo, Ohio 

• Median home price in November 2022: $161,000
• Forecasted price growth in 2023: +6.7%
• Forecasted sales growth in 2023: +4.2%

U.S. Housing Market Forecast for 2023 

The housing markets in 2020-2022 were defined by record low interest rates, record high personal savings, supply chain issues slowing homebuilders and a migration out of cities as lockdowns and remote work took over.

These factors allowed borrowers to increase their budgets and engage in bidding wars over the small number of homes on the market.

In 2023, the market looks very different.

The Federal Reserve and Mortgage Rates

From 2020 until mid-2022, the Fed worked to keep interest rates at record lows to lower borrowing costs. This happened while consumers were more flush with cash due to most discretionary spending being off-limits due to varying levels of quarantining.

In 2022, the Fed quickly changed its tone and began rapidly tightening monetary policy in order to make borrowing more expensive. This was felt almost immediately for hopeful home buyers, as mortgage rates rose from 3.1% in January to almost 7.1% in early November.

Rising rates impact all stakeholders of new home sales.

• Rising borrowing prices make credit more unaffordable.
• Aerage credit scores may lower due to rising rates on credit cards and other debt, meaning mortgage lenders are expected to approve fewer applicants.
• Higher prices increase construction costs, leading to even lower supply.

While the Fed has slowed its quantitative tightening plan, there is no signal yet of when rates will begin reversing and mortgage interest rates will begin to fall. 2023 will likely still see record-high mortgage rates across the country.

Low Housing Inventory

A low inventory of listed houses was a large contributor to price gains during the pandemic. This has not been the case in past housing market crashes or downturns, according to the Douglas Elliman Real Estate Report.

According to the National Association of Home Builders’ housing market predictions for 2023, single-family home construction should continue declining.

Redfin, a residential real estate brokerage that operates across the U.S., forecasts around 4.3 million home sales in 2023. This is a 16% decrease year-over-year and would be a record low since 2011.

National Medians

The National Association of Realtors (NAR) anticipates around half the country to experience small price increases in the new year, around 0.3% for the national average.

While that would leave approximately half of the country with slight price declines. Tthe exception to this is California.

According to the NAR, San Francisco is anticipated to see sale price declines of 10-15% and home sales drop 6.8%.

Housing Markets Trends for 2023

Midsize Housing Markets on Top

Prior to 2022, shifts in the real estate market were vastly caused by corporate and tech industries shifting more employees to remote work.

This presented the opportunity for renters in major metropolitan areas to take advantage of record-low interest rates and become homeowners in more affordable areas.

According to Realtor.com chief economist Danielle Hale, these midsize cities have more room for growth in today’s market because they didn’t see the same level of growth during the pandemic as other major areas.

Some of the hottest markets in the last year have now reached a point of unaffordability and are likely to experience buying slowdowns. These cities include Austin, Texas; Phoenix, Arizona; Orlando, Florida; and Nashville, Tennessee.

Now, it seems the trending markets have moved on to the second wave of city migration, turning to areas that have less of a focus on tech and finance and more on healthcare, manufacturing and education industries.

City Migration Continues

According to the National Association of Realtors (NAR), almost half of all homebuyers for the top 10 markets in 2023 will be out-of-town buyers.

For example, homebuyers from New York, Boston and Washington, D.C. made up a significant proportion of buyers in Hartford in the third quarter of 2022.

Remote work is still widespread and as inflation remains high, affordability is a top priority for many Americans. With these conditions, NAR forecasts current renters in cities like New York, Los Angeles and San Francisco will continue to be drawn to these top markets.

The South Remains Hot 

While not topping the Realtor.com analysis, the NAR chief economist cites the top five U.S. housing markets all in the south: Atlanta, Georgia; Raleigh, North Carolina; Dallas, Texas; Fayetteville, Arkansas; and Greenville, South Carolina.

According to the NAR Chief Economist, Lawrence Yun, the economic conditions in these five southern cities are expected to see home price increases of at least 5% in 2023.

Atlanta tops the NAR’s list of metro areas based on 10 metrics that include housing affordability, population growth and employment opportunities. Atlanta  is one of the most affordable metro areas, with more than 20% of renters able to afford a median home in the area.

Also, major west coast tech companies originally just in Seattle or San Francisco have opened offices in Atlanta, including Apple, Microsoft and Visa.

Younger Homebuyers

According to the NAR, millennials make up the largest percentage of homebuyers at 43%, a 37% increase from last year.

Millennials are the generation most likely to use the internet or an app to find homes and compare home values, while also the most likely to use a real estate agent when it comes time to buy.

Overall, 92% of younger millennials and 88% of older millennials utilized a real estate agent.

Will 2023 Be a Buyer’s or a Seller’s Market?

The past two years have been a strong seller’s market as more renters have turned to homeownership.

However, heightened affordability issues and weakened sentiment of economic prospects could reduce overall home buyer demand in the new year.

The NAR forecasts that these added concerns should lead to lower prices overall, but still above pre-pandemic levels. 2023’s market should be more balanced than the previous years, as demand and supply potentially find equilibrium.

• Read More: Sectors for Investors to Watch in 2023
• Read More: Top Investing Trends for 2023

The Bottom Line 

While some housing markets trends of 2021 and 2022 remain strong going into 2023 — higher demand than supply of homes on the market and people moving out of cities — the added pressure of high inflation and rising interest rates have shifted which areas are poised to grow in 2023. 

While added inflationary and interest rate pressure will dampen housing markets profitability, all reports show that unlike previous downturns, 2023 should not see a spike in foreclosures. Redfin forecasts a historic low for foreclosures at less than 1% of all mortgages.

Additionally, many markets that boomed in 2021 and 2022 have risen to a point of unaffordability, moving the top growing markets further towards the South and Midwest. 

Realtor.com, the NAR and Zillow all forecast that mid sized cities will experience the greatest price and sales growth in 2023. 

The information in this article is provided for informational purposes only, is not intended to be investment advice and should not be the basis of an investment decision.