Want to know if a buyers’ or sellers’ market is emerging? What can you expect over the next five years? This in-depth study explores real estate forecasts for the next five years. We analyze predictions for home prices, mortgage rates, and home sales.
Whether you’re planning to purchase your dream home or strategically selling your existing property, this article will provide you with the insight you need to confidently navigate the real estate market over the next five years.
1. Five-year forecast for home prices
The real estate market in recent years has been fueled by extremely low mortgage rates and fierce competition among buyers, leaving many wondering: what’s next for home prices? Data from the National Association of Realtors (NAR) for August 2024 paints a clear picture. The median sales price of existing homes is still close to its all-time high at $416,700 for existing homes and $429,800 for new homes (July 2024).
However, as the Federal Reserve continues to tighten interest rates, a change in price trends is expected. Expert forecasts point to a slowdown in home price growth over the next five years. This means a more gradual and sustained price increase rather than a free fall compared to the rapid pace of recent years. Several key factors contribute to this prediction:
The most immediate driver is rising mortgage rates. As mentioned above, rising interest rates will lead to less creditworthy buyers, dampening the bidding wars that previously drove prices even higher. CoreLogic, a leading provider of real estate data and analytics, projects home prices to rise 0.2% year-over-year from July 2024 to August 2024 and 2.2% from July 2024 to July 2025. This suggests that while there may be an economic slowdown, it will not be a significant price decline.
National property prices, including distressed sales, increased 4.3% year-over-year in July 2024 compared to July 2023. On a monthly basis, home prices declined 0.01% in July 2024 compared to June 2024.
This marks the 150th consecutive month that U.S. home prices have increased year-over-year, but monthly home price growth is beginning to slow and annual forecasts are showing a decline in expected gains. Home prices are expected to rise just 0.2% through August, and as mentioned above, are expected to rise 2.2% next year.
Regional Differences and Inventory
It is important to remember that the real estate market is a complex ecosystem with regional differences. Markets characterized by limited inventory and high demand, especially those experiencing robust job growth, may still experience price increases. Think of trendy coastal cities like Malibu, California, or fast-growing technology hubs like Austin, Texas, which experience a constant influx of new residents. Competition among buyers may continue in these areas, which may result in price increases above the national average.
Conversely, areas with an oversupply of homes on the market may experience a more stagnant pricing environment, especially those experiencing an economic downturn. In Rust Belt cities like Detroit, Michigan, and economically depressed rural areas, inventory could remain on the market longer, putting downward pressure on prices.
Location, regional economic conditions, and inventory levels will all continue to be important factors in determining pricing patterns. The most likely scenario for price increase is moderation, although other people are worried about a sharp drop in prices or maybe a collapse of the housing market.
2. A Five-Year Mortgage Rate Forecast
For purchasers, the prospect of obtaining an exceptionally cheap mortgage rate has diminished. Since the Federal Reserve took an active posture in raising interest rates to fight inflation, mortgage rates have significantly increased from the historic lows that drove the recent housing market frenzy to the mid-to-high single digits.
Although experts’ opinions differ somewhat on future developments, most agree that mortgage rates will rise gradually over the next two years. This forecast is in line with that of Freddie Mac, the Federal Home Loan Mortgage Corporation, which suggests that potential buyers can expect mid- to high-single-digit interest rates until 2026.
Beyond this period, the forecast becomes more uncertain. Some analysts, citing data from the Federal Housing Finance Agency (FHFA), predict that interest rates may stabilize or even slightly decrease by 2028. This will depend largely on the general economic situation. A robust economy with persistent inflation might necessitate continued rate increases to keep prices in check. Conversely, a sluggish economic performance could prompt the Federal Reserve to ease back on the brakes, potentially leading to lower mortgage rates.
The impact of rising mortgage rates on affordability is undeniable. According to data from the National Association of Realtors (NAR), higher interest rates mean buyers can get lower loan amounts for the same home price. This has led to a slowdown in the real estate market, especially in areas where affordability is already tight.
3. Predicting a Real Estate Market Crash: Boom or Bust?
Memories of the 2008 housing market crash are still fresh, and many are rightly concerned that a similar scenario could play out in the coming years. However, experts widely agree that a full-blown crash is unlikely for a few key reasons.
Robust Ledger Demand: Unlike the period immediately prior to the 2008 crash, the current real estate market is supported by robust pent-up demand. According to the latest July 2024 data from the Mortgage Bankers Association (MBA), continued demand for new homes and declining mortgage rates led to a 9% increase in applications to purchase new homes in July.
The share of FHA applications, at 29 percent, was the highest share in any MBA survey conducted since 2013, as first-time buyers continue to account for a larger share of purchasing activity, given the lack of available first-time homes nationwide, said Joel Kang, MBA vice dean and deputy chief economist.
Millennials, the largest generation in U.S. history, are in their prime home-buying years, fueling a steady rise in housing demand. In addition, demographic factors such as inventory shortages and population growth continue to put upward pressure on housing demand. Rising mortgage rates may dampen buyer enthusiasm, but are unlikely to extinguish demand entirely.
Robust Lending Standards: Another key difference from the 2008 crisis is in lending practices. Leading up to this crash, subprime mortgages with relaxed lending standards were readily available, allowing many unqualified buyers to enter the market. This created a bubble that eventually collapsed. Now, stricter lending regulations put in place after the 2008 financial crisis ensure that borrowers are financially sound and can afford to pay their mortgages. This significantly reduces the risk of widespread defaults, which was a major factor in the last crash.
Limited Supply: As mentioned above, a shortage of available homes is an ongoing issue in the real estate market. Realtor.com data for April 2024 shows that national inventory is historically low. This shortage creates challenges for buyers, but acts as a buffer against a dramatic drop in prices. Even if price growth slows, it is unlikely that the housing shortage will lead to an oversupply of properties on the market, and a distressed situation will be avoided.
Government Intervention: Although there are no guarantees, the possibility of government intervention in the event of a major economic downturn cannot be completely ruled out. During the 2008 crisis, the government implemented various measures to stabilize the market, including mortgage modifications and programs to assist struggling homeowners. The Federal Housing Finance Agency (FHFA) and other agencies continue to monitor the health of the market and may take steps to prevent a severe market correction.
Of course, the real estate market is not immune to unexpected events. A significant economic downturn or severe financial crisis could cause a more severe market correction. However, based on current data and trends, a 2008-style real estate market crash seems unlikely.
4. Housing Supply Forecast: Closing the Gap
Demand for housing remains strong, but a persistent issue of a lack of available homes continues to plague the market. Realtor.com data for April 2024 shows national inventory is at a historically low. This shortage has contributed to rapid price increases in recent years and poses challenges for aspiring homeowners.
Experts have a range of predictions for the future of housing supply. Some expect a gradual increase in new construction as builders scale up production to meet continued demand. Low interest rates for construction loans and a growing population could encourage builders to put more units on the market. In addition, slowing home price growth could encourage some existing homeowners who have been waiting to sell because the market was previously hot to put their properties on the market, further increasing inventory.
However, other analysts predict a continued shortage in housing supply. Rising costs of construction materials and labor could deter some builders from taking on new construction projects. Additionally, zoning regulations and lengthy permitting procedures in some areas may hinder the development of new housing units.
The ultimate deployment of housing supply will depend on a complex interplay of factors. Government measures to streamline the development process, incentives for builders, and an increased construction workforce could contribute to a more robust supply. However, there may be challenges in overcoming long-standing regulatory hurdles and weathering economic uncertainties.
What does this mean for the market?
A significant increase in housing supply would alleviate some of the upward price pressures and make housing more affordable for buyers. However, a continued tight supply environment combined with strong demand will continue to favor sellers and may limit the purchasing power of potential homeowners.
Monitoring trends in building permits and inventory levels is important to understand how the supply side is evolving and influencing overall market dynamics. The next section summarizes the overall outlook for the U.S. housing market over the next five years.
5. Overall Real Estate Market Outlook: Rebalancing
The next five years for the US real estate market are likely to be characterized by a rebalancing between various factors. Here is a summary of what to expect:
Mortgage Rates: Mortgage rates are expected to gradually decline in line with the overall economic climate.
Property Prices: Slower property price growth is the most likely scenario, with value appreciation slowing compared to recent years. Regional differences will remain, with high demand areas likely to see slight price increases, while other regions may face a more stagnant pricing environment. Markets with strong job growth and limited supply, especially trendy coastal cities and tech hubs, may still see price appreciation above the national average. Conversely, areas with stagnant economies and an oversupply of housing may see a more stagnant pricing environment and properties may remain on the market longer.
Market Activity: The real estate market may be cooling off after the hectic pace of recent years. However, given the persistent demand and limited supply, sales activity is unlikely to slow significantly. The market may be moving into a more balanced environment where neither buyers nor sellers are unfairly favored.
Looking forward, the key question is: will buyers or sellers win?
The answer will depend on the interplay of several factors, including trends in mortgage rates, the pace of home price growth, and the overall strength of the economy. As mortgage rates stabilize and home price growth slows, the market may find a sweet spot where both buyers and sellers find opportunities. However, if mortgage rates continue to rise significantly or affordability becomes a major issue, buyer enthusiasm may wane and sellers may have less leverage.
It is important for potential buyers to stay informed about market trends and local inventory. Advice from a qualified real estate agent can help you navigate a potentially changing situation. Conversely, sellers may need to adjust their pricing strategies to adapt to a more balanced market.
Overall, the U.S. real estate market appears to be moving toward a period of normalization over the next five years following recent increases in prices and activity. While some uncertainty remains, due diligence and informed decisions can help both buyers and sellers navigate this evolving market.
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