Housing Market Predictions: The Forecast for the Next 5 Years

It’s been a wild real estate ride over the last few years. After a red-hot market characterized by super-low interest rates and frenzied bidding wars, mortgage rates increased to their highest level in more than 20 years. The average rate for a 30-year mortgage more than doubled between August 2021, when it was just 3 percent, and August 2023, when it reached beyond 7 percent — and in October, it briefly surpassed 8 percent. As you might imagine, this led to a slowdown in buying activity. Even so, with inventory still scarce, home prices remain unaffordable in many parts of the U.S.

There are plenty of predictions about where the housing market is going in 2024. But what about further out? After all, buying a home often requires long-term planning. We asked several industry experts to peer into their crystal balls and give us their real estate forecast for the next five years. Here’s looking at you, 2028.

The current housing market

• Home sale prices: The country’s median existing-home sale price in October 2023 was $391,800, according to the National Association of Realtors (NAR) — their highest September price on record. For new-construction homes, National Association of Homebuilders (NAHB) data shows that October’s median sale price was slightly higher at $409,300.
  
• Inventory: The supply of homes for sale remains quite low, per NAR data. The inventory of unsold existing homes was at a 3.6-month supply in October, down 5.7 percent from a year ago and well below the 5- to 6-month supply that a balanced market would require.
  
• Days on market: With high mortgage rates putting a purchase out of reach for many, homes are taking longer to sell. In October, the median length of times homes spent on the market was 23 days, per NAR.
  
• Homes sold: Fewer existing homes are selling nationwide too, as many homeowners choose to stay put with locked-in mortgage rates much lower than current rates. The number of sales in October was down 14.6 percent year-over-year, per NAR. Meanwhile, the pace of new single-family home sales rose 17.7 percent in October versus last year, per NAHB data.
  
• Mortgage rates: According to Bankrate’s national survey of large lenders, the average 30-year mortgage rate as of late November was 7.55 percent.

Forecast for mortgage rates and types

Lawrence Yun, NAR’s chief economist, believes mortgage interest rates could remain at a general level around 7 percent for most of 2024. However, he thinks rates have likely crested: “I believe we’ve already reached the peak in terms of interest rates,” he told attendees at a November NAR convention. Within two years, he says, the rate should return to 5.5 or 6 percent. Danushka Nanayakkara-Skillington, assistant VP of forecasting and analysis for NAHB, agrees, predicting rates will drop to about 6 percent by the middle of 2024.

Because rates are high, Yun foresees a greater interest in adjustable-rate mortgages through next year. However, after that, he predicts 90 percent of Americans will return to the traditional 30-year fixed-rate mortgage. Greg McBride, CFA, Bankrate’s chief financial analyst, thinks the 30-year fixed will remain the dominant mortgage product. “It provides the certainty borrowers want, lenders can sell them to investors and there is a vibrant secondary market of global investors eager to buy them,” he says.

Predictions for home prices

Yun foresees no major changes in purchase price tags on a nationwide level next year, with fluctuations of only about 5 percent one way or the other. The only exception is California, he says, where the market could see 10 percent declines: “Because it’s so expensive, California is always the most vulnerable to changes in interest rates.” Overall, in five years, Yun expects prices to have appreciated a total of 15–25 percent.

McBride predicts home prices will average low- to mid-single-digit annual appreciation over the next five years. This rate of appreciation, he says, is consistent with the long-term average of home prices increasing by a rate that hovers a percentage point above the inflation rate.

Will the housing market crash?

While it may show bubble-like characteristics, Yun does not expect the residential real estate market to pop. He does predict that sales will be at a low point next year, with only 5.3 million units sold, but he foresees a gradual increase afterward, up to an annual 6 million units by 2027. Despite today’s higher mortgage rates, home prices are still strong, he adds. Even if they decline 5 percent or even 10 percent next year, that’s not anywhere close to crashing, which he says is characterized by about a one-third drop.

“A crash happens with oversupply,” Yun says. “A 30 percent decrease will not happen, because there isn’t enough inventory.” He believes the housing supply will balance out within five years.

Many other experts agree that there is no danger of an imminent housing market crash. Not only is inventory is too scarce, as Yun notes, but lending standards today are much stricter than they were back in the days of the Great Recession. Mortgage lenders are largely not issuing loans that borrowers can’t really afford anymore, which helps keep foreclosure rates low. And those who do borrow have excellent credit: a very high median score of 770, according to the Federal Reserve Bank of New York.

Will we shift into a buyer’s market?

Yun expects the overall seller’s market to continue as long as housing inventory remains low. By five years out, though, he foresees more of a balanced market, where neither the buyer or seller holds a significant advantage. Instead, the negotiating power between parties will be more equal and depend on the individual case.

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Caroline Feeney, director of content and executive editor at HomeLight, says the shift away from a seller’s market has already begun. According to a recent survey the company conducted, 51 percent of HomeLight agents described their current local market as a seller’s market. She also expects a balanced market within a few years, though, and says that 55 percent of agents believe the markets that heated up the fastest during the pandemic — including Austin, Phoenix and Boise — are likely to be the first to cool down. This scenario may already be playing out: The median home sale price in Austin was down nearly 3 percent year-over-year, while the number of homes sold is down nearly 5 percent, according to October Redfin data.

Where will new homes be built, and what kind?

With hybrid work schedules becoming the norm and commuting no longer as relevant, Yun predicts the suburban market will remain strong. He expects growth in areas with rising populations, including the Carolinas, Florida, Texas and Tennessee. Backing up his prediction, Nanayakkara-Skillington of NAHB says 50 percent of new single-family construction is in the South — and Southern markets scored big in Bankrate’s recent Housing Heat Index as well.

The number of single-family homes under construction decreased at the end of 2022. In contrast, the number of multi-family homes under construction has increased over the last few years, says Feeney, who credits this growth in part to their lower price tags and the pressure on municipalities to relieve shortages and provide more affordable housing. Still, with high mortgage rates and inflationary building material prices, Nanayakkara-Skillington expects the multi-family market’s growth to stabilize within a few years, with the number of new housing starts decreasing 8 percent in 2023, and another 5 percent in 2024.

Source: Bankrate.com