Housing Market Predictions for The Next 5 Years

Talia Lee-
July 03, 2024

The real estate market has seen significant volatility in recent years. Following a period of intense activity marked by low interest rates and competitive bidding wars, mortgage rates have surged to their highest levels in over two decades. From a low of 3 percent in August 2021, the average rate for a 30-year mortgage more than doubled by October 2023, climbing to 8 percent. As of April 2024, rates have stabilized around 7 percent. Predictably, this upward trend has tempered buyer enthusiasm, contributing to a slowdown in purchasing activity. Nevertheless, with housing inventory remaining limited, home prices continue to be prohibitively high in numerous areas across the United States.

There’s no shortage of speculation on the immediate future of the housing market, but what about the long term? Planning for a home purchase often involves looking several years ahead. We’ve consulted with several industry experts to gain insights into their real estate forecasts for the next five years, peering into the landscape up to 2029.

Current trends in the housing market are setting the stage:

  • Home sale prices: As of February 2024, the median price for existing homes stands at $384,500, marking a 5.7 percent increase from the previous year, according to the National Association of Realtors (NAR). New-construction homes, on the other hand, boast a slightly higher median sale price of $420,500 as reported by the National Association of Homebuilders (NAHB).
  • Inventory: Housing inventory remains notably low, with NAR data indicating a mere 2.9-month supply of unsold existing homes in February. This falls well short of the 5- to 6-month supply typically associated with a balanced market.
  • Days on market: Elevated mortgage rates are impacting buyer affordability, resulting in longer selling times for homes. In February, the median days on market rose to 38 days, up from 34 days a year earlier, according to NAR.
  • Homes sold: Despite challenges, national sales of existing homes saw a notable increase of 9.5 percent in February 2024, according to NAR. Concurrently, new single-family home sales saw a modest uptick of 1.5 percent in January 2024, reflecting a 1.8 percent rise from the previous year based on NAHB data.
  • Mortgage rates: Currently, the average 30-year mortgage rate, as reported by Bankrate’s survey of major lenders in early April, stands at 7.08 percent, reflecting ongoing fluctuations in interest rates.

Looking ahead, these indicators suggest a dynamic and evolving housing market landscape, influenced by economic conditions, buyer affordability, and inventory availability, all of which will continue to shape the trajectory of the market in the coming years.

Lawrence Yun, the chief economist at NAR, anticipates that mortgage interest rates will likely hover around 7 percent throughout 2024. He expressed optimism that interest rates have peaked, stating, “I believe we’ve already reached the peak in terms of interest rates,” during a November NAR convention. Looking ahead, Yun expects rates to gradually decrease to around 5.5 or 6 percent within the next two years, contingent on the federal budget deficit not exerting sustained upward pressure on borrowing costs.

Given the current high rates, Yun foresees increased interest in adjustable-rate mortgages in the near term. However, he predicts a return to the traditional 30-year fixed-rate mortgage for about 90 percent of Americans after next year.

Greg McBride, CFA, the chief financial analyst at Bankrate, asserts that the 30-year fixed-rate mortgage will remain the predominant choice. “A fixed-rate mortgage provides the certainty borrowers want,” McBride explains. “It is the best gauge of affordability, and currently, there is little upfront advantage to opting for an adjustable-rate mortgage, as their rates aren’t significantly lower than fixed rates,” he concludes.

Yun anticipates minimal fluctuations in nationwide purchase prices next year, with variations of approximately 5 percent in either direction. Looking ahead five years, he expects prices to appreciate by a total of 15 to 25 percent.

McBride forecasts that home prices will experience annual appreciation in the low to mid-single digits over the next five years. This level of appreciation, he notes, aligns with the historical average of home prices increasing slightly above the inflation rate.

While the residential real estate market may exhibit bubble-like traits, Yun does not foresee a bursting scenario. He anticipates a dip in sales next year, projecting only 5.3 million units sold, but predicts a gradual increase thereafter, reaching an annual rate of 6 million units by 2027.

Despite current higher mortgage rates, Yun asserts that home prices remain robust. Even if they were to decline by 5 percent or even 10 percent next year, he argues this would not constitute a crash, which typically involves a one-third drop.

“A crash occurs due to oversupply,” Yun explains. “A 30 percent decrease is unlikely because of insufficient inventory.” He believes housing supply will stabilize within five years.

Many other experts echo Yun’s sentiment that an imminent housing market crash is unlikely. They point to scarce inventory, stricter lending standards compared to the Great Recession era, and the fact that mortgage lenders are now more cautious about issuing loans that borrowers may struggle to repay, thus keeping foreclosure rates low. Additionally, borrowers today typically have excellent credit, with a median score of 770, according to the Federal Reserve Bank of New York.

Yun anticipates that the seller’s market will persist as long as housing inventory remains low. However, looking five years ahead, he predicts a shift towards a more balanced market, where neither buyers nor sellers have a significant advantage. Instead, negotiating power will be more evenly distributed and vary case by case.

Caroline Feeney, formerly of HomeLight, notes that the transition away from a seller’s market is already underway. She expects a balanced market to emerge within a few years, highlighting that 55 percent of HomeLight agents surveyed anticipate cooling in markets that saw rapid escalation during the pandemic, such as Austin, Phoenix, and Boise. This trend may already be visible: Redfin data from February indicates a 3 percent year-over-year decrease in the median home sale price in Austin, with homes there lingering on the market for an average of 81 days.

With hybrid work schedules becoming commonplace and commuting less central to daily life, Yun predicts continued strength in the suburban housing market. He anticipates growth in regions experiencing population increases, such as the Carolinas, Florida, Texas, and Tennessee.

Danushka Nanayakkara-Skillington, Assistant VP of Forecasting and Analysis at NAHB, supports this outlook, noting that 50 percent of new single-family construction is concentrated in the South. Southern markets also scored highly in Bankrate’s recent Housing Heat Index.

While the number of single-family homes under construction decreased towards the end of 2022, there has been an uptick in multi-family construction in recent years. Feeney attributes this growth partly to their affordability compared to single-family homes and municipalities’ efforts to address housing shortages.

However, Nanayakkara-Skillington expects the multi-family market’s growth to stabilize in the coming years due to high mortgage rates and increasing costs of building materials driven by inflation, potentially leading to a decline in new housing starts.

Planning to buy a house is a significant commitment, and beginning to save five years ahead is a prudent approach. Here are some strategies to help you organize your finances and accumulate funds for a down payment, aiming to achieve homeownership by 2029.

Changing jobs often leads to a quicker route to a substantial salary increase, so be open to exploring other opportunities to enhance your earning potential. According to a 2022 study by the Pew Research Center, 60 percent of workers who switched jobs experienced a boost in earnings in their new positions, even after adjusting for inflation. If switching jobs isn’t feasible, consider the most effective methods for negotiating a raise with your current employer.

When saving up to buy a home, it’s crucial to not only accumulate savings but also prioritize reducing your outstanding debts such as credit card balances, student loans, and car payments. Lowering your debt-to-income ratio improves your eligibility for a mortgage in the future.

A higher credit score typically results in a lower mortgage rate when you’re ready to purchase a home. While most mortgage types require a minimum score of 620 for qualification, aiming for a higher score is beneficial. By consistently paying your bills on time and taking steps to improve your credit score before beginning your house-hunting journey, you could potentially save significant money over time.

Real estate markets are highly localized, with significant variations not only between regions or states but even within the same city. While understanding broad national trends is essential, when budgeting and saving for a home purchase, it’s crucial to focus on the conditions specific to the neighborhood you’re interested in. This is where a skilled local real estate agent can be invaluable: They possess deep expertise in their local markets. Finding a real estate agent you trust and who knows the area well can greatly benefit your home-buying journey.

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