Low housing supply could squeeze home prices up 5% in 2023 even though mortgage rates have spiked, Zillow economist says

• Low housing inventory will squeeze prices higher, according to Zillow's chief economist.
• Skylar Olsen now expects home prices to jump 5% in 2023.
• Falling supply “is a big, huge, massive part of the picture,” she said.

Reduced supply is going to help the housing market overturn much of Wall Street's gloomy forecasts and rack up another year of solid gains, according to Zillow's chief economist.

Skylar Olsen said Monday that she's expecting home prices to have climbed 5% year-on-year by the end of 2023, due to dwindling inventory levels.

Declining inventory "is a big, huge, massive part of the picture," she told CNBC's "Closing Bell: Overtime".

"Only two months ago, before we saw these radically low new listings numbers, we were forecasting something much more like 1.2%, something small," Olsen added. "Now, 5% – that's on the hotter side of steady and stable."

Olsen's bullish outlook for property prices comes amid growing evidence of a fall in homes coming to market, with listings down 39% from the pre-pandemic era as of May, per Zillow data.

Goldman Sachs also recently revised its 2023 outlook for home prices up from a 6.1% plunge to just a 2.2% fall, citing "the tailwind from tight housing supply."

The elevated forecasts come even though the cost of getting a mortgage has soared over the past year due to the Federal Reserve's aggressive war on inflation pushing up interest rates. 

Thirty-year fixed mortgage rates have jumped from 5.2% to 6.7% over the past year, per data from Freddie Mac.

Demand for housing tends to fall when the cost of borrowing to buy a home rises, driving down prices.

Olsen's 5% home-price growth target clashes with most of Wall Street, with Goldman and other banks still forecasting declines.

Tesla CEO Elon Musk and Wharton professor Jeremy Siegel have also offered up grim outlooks for the housing market.

Read more: Wall Street is divided on the outlook for US house prices. Here's what 6 experts have recently said.