Homebuyers will flock to the Midwest in 2023 because prices will still be too expensive in coastal states, a Zillow economist predicts

• The Midwest could be 2023's hottest housing market because it's affordable, one Zillow economist said.
• Buyers may look at cities like Chicago, Indianapolis, and Cleveland, where prices have remained stable.

Homebuyers who've become dismayed by the increasingly high prices in coastal states like California and New York might find themselves buying homes in the Midwest next year, a senior economist at Zillow predicts for 2023.

Orphe Divounguy told Insider that the Midwest's relative affordability makes it an attractive destination for remote workers who are looking to buy a home next year, even if mortgage rates remain elevated. One motivating factor for these buyers is that remote work has unlocked the possibility for many people to leave high tax areas, Divounguy suggests.

Regional heavyweights like Chicago, Indianapolis, Cleveland, Cincinnati, and Columbus, Ohio, could benefit from this trend because home prices are relatively more attainable for renters who are looking to make the jump into homeownership compared to cities like San Francisco, Divounguy added.

For example, Zillow's Home Price Index, which measures monthly property price changes, shows that the median price of homes in Chicago is just over $314,000, which is about $43,000 under the national average. Meanwhile, the data shows that more than 54% of homes in Chicago are sold under their listing price, compared to 34% in San Francisco and 48% in Boston, suggesting that Chicago's housing market is not as competitive as those in coastal states.

"When we talk about hot markets in the Midwest, we are not necessarily talking about strong home value growth, and certainly not anything like the record growth we saw in some areas in 2021," Divounguy said. "We are really talking about the Midwest having a healthier balance between buyers and sellers, resulting in more churn."

The Midwest offers a more balanced market for homebuyers to compete

In other words, Divounguy suggests that Chicago and other midwestern metros represent a balance to the more speculative and erratic markets elsewhere, offering value through their stability and attainability. Buyers who are expecting a big equity gain within a few years may be disappointed, but those who simply want to own a home and are ready and willing will find that they have options across the midwestern US.

The Midwest also offers a chance to experience respected cultural amenities like the Art Institute of Chicago, the Milwaukee Art Museum, or Cleveland's West Side Market, which is one of the nation's oldest indoor-outdoor marketplaces.

Throughout the pandemic, low interest rates and federal stimulus dollars helped spark a homebuying frenzy unseen in years. In turn, intense competition for homes pushed prices up to record highs and essentially shut out many would-be homebuyers who lacked the upfront cash and qualifications to compete. At the same time, banks and investment firms started buying up homes in boomtowns like Phoenix, Arizona and Las Vegas, Nevada to cash-in on the pandemic's hot housing market, further contributing to the housing crisis.

But the Federal Reserve's aggressive interest rate hikes to tame inflation have caused home prices to come back to earth in some of the country's hottest markets. Divounguy said this presents an opportunity for buyers to take advantage of the current market conditions and find an affordable home to buy, even though they may not get a better mortgage rate until late 2023 at the earliest.

"This is a much friendlier market for buyers, who are far less likely to face bidding wars, have more time to consider their options and more negotiating power," Divounguy said.

Buyers are already looking for new markets to purchase homes

Data from Redfin suggests that many homebuyers are already starting to look for a more affordable market to buy in. More than 24% of homebuyers were looking to buy in a metro area outside of where they lived during the third quarter of 2022, up from 19% during Q3 2019, according to a report from Redfin.

Homebuyers in expensive markets like Denver, New York City, and San Francisco were routinely searching for homes in less expensive midwestern markets, the report added. For instance, more than 31% of Redfin.com searchers in Denver were looking to buy elsewhere with Chicago being their top out-of-state search destination.

But prices within the Midwest can range significantly. For instance, the typical home in Chicago's Lincoln Park neighborhood is roughly $539,000, Zillow suggests, while a home in the South Shore neighborhood goes for $168,000. But there is value to be had elsewhere. The typical home in Milwaukee is $181,000 while in St. Louis, buyers should expect to spend $176,500, Zillow suggests.

"Buyers who can afford it should consider taking advantage of current conditions," Divounguy said. "That's a challenge for many households, even in the relatively affordable Midwest. But waiting out this market may not be the best approach for buyers ready and able to buy now."