Seattle home prices will likely fall in 2023. That won’t help buyers

The new year will bring Seattle a new housing market, one without the runaway prices and jaw-dropping bidding wars, yet still difficult for anyone but the region’s wealthiest shoppers.

Economists say home prices are likely to fall or flatten here and across the country. Fewer people will buy homes. Rents, too, may climb far more slowly than they have in recent years, as people stay put.

But Seattle’s defining inequality will remain: Rents and home prices will remain far out of reach for many.

Here’s what real estate forecasters expect for the year to come.

Home prices: flat or falling?

The pandemic frenzy is over. After two years that saw home prices shoot up by double-digit percentages, particularly in suburban areas like the Eastside, prices are now on the decline.

To put it more existentially: “Waning affordability and consumer confidence have negatively affected the psyche among prospective homebuyers,” read one analysis published by Morningstar, an investment research company.

Economists expect that to continue in 2023, as a recession threatens and interest rates remain high. Nationally, home prices could fall between 4% and 5.5%, according to forecasts from Moody’s, Redfin and Wells Fargo. Zillow has a slightly more reserved outlook: The Seattle-based listing site expects that home values nationally will be flat.

Seattle is likely to see a sharper decline. The region is already one of the fastest-cooling housing markets in the country.

Seattle-area prices could fall far faster than the national trend — as much as 10% — said Redfin chief economist Daryl Fairweather. Windermere economist Matthew Gardner has a more modest prediction. He expects average sale prices for single-family homes to dip 5.3% in the Seattle area in 2023.

Seattle could see a sharper downturn than other markets in part because, when home prices are already this high, rising mortgage rates can quickly push mortgage payments out of reach, Fairweather said. Add to that: If rents level off (more on that in a minute), even highly paid tech workers might hold off on buying homes.

“Even people who are well-off will just make the rational decision to rent because a monthly mortgage is more than what they may be able to get in rent,” Fairweather said. 

So, will I be able to afford a house?

You won’t be surprised to hear this one: A 5% or 10% drop will not suddenly make the region affordable. 

Even as prices dip, the monthly cost of affording a home is climbing.

The monthly payment for the median King County home is now about $4,300, a whopping $1,200 more than a year ago, according to the real estate data firm Attom Data Solutions. (Median means half of homes cost more, half cost less.)

By another estimate, homebuyers in the Seattle area must earn $169,000 a year to afford the median home with a 20% down payment. That's higher even than our metro area's record-high median income of $101,700. 

Higher interest rates driving higher monthly payments appear to be here to stay. After super-low rates between 2% and 4% earlier in the pandemic, Fannie Mae projects rates will hover around 6% throughout 2023.

Some homeowners could end up underwater

Many people buy a home and stay put for years. Barring a crisis like the housing crash in 2008, they likely will have built up some equity when they eventually sell.

But that may not be the case for people who bought in the past few years and have to sell in 2023, perhaps because of a layoff, divorce or other urgent reason.

If home prices drop 4%, about 6% of recent Seattle-area homebuyers will be underwater, meaning they would owe more than their house is worth by the end of 2023, according to Redfin. If prices drop 12%, nearly 16% would be underwater. (Recent buyers are those who bought between January 2021 and September 2022.)

Even the worst-case scenario in Redfin's analysis is a different picture compared to the 2008 financial crisis. By early 2013, nearly a third of Seattle-area homeowners were underwater, Zillow reported at the time. 

Market watchers don't expect a flood of owners to lose their homes. For now, the Seattle area, including Tacoma and Bellevue, has among the lowest foreclosure rates in the country.

Still, the share of recent homebuyers who could be underwater here is larger than most other major markets.

What about rents? 

Renters, too, have struggled with rising prices. When the pandemic hit, in-city rents dropped and suburban rents shot up as many tenants sought out more space or cheaper prices. 

Rents across King, Snohomish and Pierce counties dropped 10% in 2020 and shot up 21% in 2021, according to Apartment List.

That roller coaster has slowed. Seattle-area rents were up 2.5% in 2022, as of November.

Even so, "what's happening right now isn't undoing the affordability crisis anywhere,” said Rob Warnock, a senior research associate at Apartment List.

The trend of more modest rent growth is likely to continue, though Warnock said he doesn't have an exact projection for 2023. Another rent tracking company, CoStar, expects rents across the Seattle area to increase 3.4%.

The new year will be “nothing compared to the extremes that took place in the first two years of the pandemic," Warnock said.

Rents may be climbing more slowly than earlier in the pandemic, but that won't feel like much to the average renter, especially those who recently experienced a hefty rent hike.

“It's putting a pause on what's been going on for the past couple of years and making it so that real estate owners and investors suddenly are realizing that their investments carry a bit of risk," Warnock said. "I don't think that we're on the precipice of undoing what we experienced during the pandemic.”

More new apartments will hit the market

A record number of new apartments were finished across the Seattle area in 2022, and 2023 is set to continue that trend.  

About 12,000 new market-rate units will hit the market in 2023, said CoStar analyst Elliott Krivenko. Among the thousands built in Seattle, many are the luxury towers opening in downtown and South Lake Union.

To attract renters to all those new apartments as rents cool off, more than half of downtown properties are offering concessions like a free month of rent, compared to about a fifth of properties in the suburbs, according to CoStar. (CoStar’s data does not include government-supported housing or buildings with fewer than five units.)

Even with all those new rentals, the permitting and construction of new apartment projects already have started to cool off, Krivenko said. That will show up down the road, since the buildings can take years to permit and build.

Krivenko’s outlook: “Expect things to slow down by 2024.”