What's ahead for the Twin Cities area housing market in 2023?

Home sales in the Twin Cities during 2023 are expected to be on par with 2022 despite the ongoing pressure of higher mortgage rates, analysts and participants in the market say.

Meanwhile, price gains will be in line with the national average, though that's partly a sign of a cooling off at the national level.

Home construction will remain tepid.

Here's a complete rundown of predictions for the Twin Cities home market, along with U.S. comparisons, in 2023:

Sales

The National Association of Realtors (NAR) calls 2023 "the year of the turning point," though how much things turn remains to be seen. The past year didn't come close to matching record sales during 2021 and home sales in the coming year will at least be flat compared with 2022.

That makes the Twin Cities a standout. Realtor.com predicts Twin Cities metro sales to be down 0.8% year over year compared with a 14% decline nationwide.

Economists with the online brokerage Redfin say with would-be buyers pressing pause because of affordability challenges led by high mortgage rates, people will only move if necessary. Redfin sees a 16% drop in home sales nationally in 2023.

Listings

In contrast to the slowdown depicted in transaction data, there are more buyers in some parts of the Twin Cities metro area than sellers. That means a shortage of house listings that will continue into 2023.

For the past several months, there's been a double-digit decline in the number of new listings in the Twin Cities compared with 2021. While the decline in buyers who are signing purchase agreements has outpaced the decline in those new listings, the number of house listings available for buyers is rising only modestly.

At the current sales pace, there are still only enough houses for sale to last less than two months, according to the latest data from the Minneapolis Area Realtors. And with so many homeowners unwilling to give up the low mortgage rates that existed before 2022, there's going to be a dearth of would-be sellers in 2023. That will continue the listing shortage that played out in the last half of 2022.

Prices

Home prices in the Twin Cities will continue rising, but at a much slower pace than during the first half of 2022, when bidding wars ruled and prices increased double digits.

There's also an expectation that affordability should at least stabilize — and has a chance to improve — next year.

That's because home prices in the Twin Cities are still relatively affordable compared with other regions. They didn't increase as much during the buying frenzy in 2020 and 2021.

On Tuesday, the S&P CoreLogic Case-Shiller report showed that home prices in the Twin Cities increased 5.9% in October, compared with a national gain of 9.2%. Some parts of the country, including the Tampa and Miami areas, are still seeing gain exceeding 20%.

Realtor.com says price growth in the Twin Cities during 2023 is expected to top 5.6%, almost exactly in line with a 5.4% gain nationwide.

Construction

Home builders saw it all in 2022: bidding wars and wait lists at the start of the year, then a sudden and sharp decline in sales. By the end, home building in the Twin Cities trailed 2021. And the coming year is likely to lag 2022.

Nationwide, 2022 is the first year in at least a decade that single-family starts have declined.

That's sobering news for builders, but a glimmer of hope for buyers. With slack demand and growing inventories of unsold homes, many builders are rolling out incentives.

The average discount is now about 8%, HSH.com, the nation's largest mortgage data company, reported recently. If construction costs also cool, that could mean even better deals for buyers next year. Also, many builders have new, unsold homes that are available for move-in.

Mortgage rates

Keith Gumbinger of HSH.com said that 2022 was the most volatile period for mortgage rates in upward of four decades.

He said that with the tumult of 2022 behind us, the odds favor much less volatility in 2023.

Based on a variety of economic assumptions, he said the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac should stay within the 5.875% to 6.875% range for 2023.

"Should a recession form next year, there's a good chance that we'd see rates push though that bottom," he said. "Conversely, if inflation doesn't behave as hoped, that top figure might not hold, either."

That's consistent with the NAR forecast, which says that mortgage rates have likely peaked. If inflation continues to slow down, rates may stabilize below 6%, the association said.

How buyers will cope

Affordability has been the story of the year and it will remain so during 2023.

A Zillow survey in early 2022 showed that among recent home buyers, 18% had purchased with a friend or relative who wasn't their spouse or partner. Of prospective home buyers, 19% intended to buy with a friend or relative in the next 12 months.

"Americans finding ways to make payments on a roof over their heads is going to drive the market next year," Zillow chief economist Skylar Olsen said in a statement.

A more recent Zillow survey shows that there is also likely to be a surge in first-time landlords. That's because record-low mortgage rates enabled an unusually number of investment and second-home purchases.

With rent growth expected to rise faster than home values over the next year, many of these second homes will become new sources of income.

Similarly, people who are thinking about moving during 2023 might decide to keep their current house and rent it out. A homeowner would be able to preserve their low mortgage rate and take advantage of rising rents.