Housing market forecast: forecasts for the next 5 years

It’s been a wild ride in real estate over the past few years. After a scorching market characterized by bidding wars, low interest rates and high prices, mortgage rates hit a 20-year high, leading to a slowdown in buying activity and mortgage prices. ‘purchase. Yet with inventory still low, home prices remain high in many parts of the United States

There are many predictions about how the housing market will develop in 2023. But what about further? After all, buying a home often requires long-term planning. We asked several residential real estate experts to peer into their crystal ball and give us a five-year forecast of the housing market. I’m watching you, 2027.

The current housing market

But first, a snapshot of the residential real estate scene, as of fall 2022.

Home sale price: The median selling price of existing homes rose 8.4% from a year ago to $384,800, according to September 2022 data from the National Association of Realtors (NAR). For new homes, the current national average selling price is $470,600, up about 14% from a year ago, says Danushka Nanayakkara-Skillington, assistant vice president, National Association of Homebuilders (NAHB) forecasts and analysis.

Inventory: Although higher than it was in January 2022, housing supply remains historically low, says NAR Chief Economist and Senior Vice President for Research Lawrence Yun. The inventory of unsold existing homes was at a 3.2 month supply in September 2022.

Days on the market: With inventory still tight, homes continue to sell quickly. In September 2022, the median days on market for homes sold ranged from 13 to 23, depending on price, according to September NAR data. In a more typical market, it’s 45 days, Yun says.

Houses sold: Fewer existing homes are selling nationwide. According to September NAR data, in 2022 the total seasonally adjusted figure fell from 6.49 million in January to 4.71 million in September. Meanwhile, sales of new single-family homes in July 2022 were at a seasonally-adjusted annual rate of 511,000, or 29.6% lower than in July 2021, according to the US Census Bureau and the Department of Housing and Urban Development.

30-year mortgage rates: According to Freddie Mac, the current average 30-year fixed mortgage rate was 7.08%, the highest in 20 years.

The new house begins: According to Nanayakkara-Skillington, the seasonally adjusted annual rate of new single-family home starts is 892,000, down 18.5% from a year ago.

Predictions for mortgage rates and types

Mortgage interest rates could continue to rise for a few weeks or months, Yun said, adding that seven percent appears to be the level for the rest of this year and most of next year. Within two years, the rate should return to five and a half or six percent, he adds. Nanayakkara-Skillington agrees, predicting rates will drop to around 6% by mid-2024.

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

Home Price Forecasts

Yun predicts zero or minor changes in purchase price tags nationwide next year, with increases or decreases of around 5%. The only exception is California, he says, where the market could see a 10% drop: “Because it’s so expensive, California is always the most vulnerable to changes in interest rates. Overall, in five years, he expects prices to have appreciated a total of 15-25%.

McBride has a similar perspective. He predicts that house prices will see an average annual appreciation in the lower to mid single digits over the next five years. This rate of appreciation, he says, is consistent with the long-term average of house prices increasing by a rate that is one percentage point above the rate of inflation.

Will the real estate market collapse?

Although he showed bubble-like properties, Yun does not expect the residential real estate market to burst violently. Although he predicts sales will bottom out next year, with just 5.3 million units sold, he expects a gradual increase thereafter, up to 6 million annual units by 2027. Despite higher mortgage rates, house prices are still higher than they were a year ago, he adds. Even if they drop 5% (or 10% in California) next year, it’s not about to collapse, which is characterized by a one-third drop. “A 30% reduction will not happen because there is not enough inventory,” he explains. “A crash occurs with oversupply.” He thinks the housing shortage will continue this year, with supply balancing out within five years.

Will it become a buyer’s market?

Yun expects the seller’s market to continue, while housing stock remains low. Within five years, however, he predicts a balanced market, where neither buyer nor seller dominates. Instead, the bargaining power between the parties will be more equal and will depend on the individual case.

Caroline Feeney, editor of HomeLight, believes that the abandonment of the seller’s market has already begun. According to a recent survey conducted by the company, only 51% of HomeLight agents described their current local market as a seller’s market. She also expects a balanced market within a few years.

Where and what type of houses will be built?

As hybrid work schedules become the norm and commuting is no longer as relevant, Yun predicts the suburban market will continue to be strong. Meanwhile, 55% of top HomeLight agents believe the markets that have warmed the fastest during the pandemic (including Austin, Phoenix and Boise) are likely to be the first to cool down and experience the biggest declines during a market correction, says Feeney. Yun expects growth in areas with growing populations, namely the Carolinas, Florida, Texas and Tennessee. In support of his prediction, 50% of new single-family construction is in the South, Nanayakkara-Skillington notes.

The number of single-family homes under construction has fallen over the past four months. By contrast, the number of multi-family homes being built has increased in recent years, Feeney says, who attributes the growth in part to their lower prices – apartments tend to be cheaper than single-family homes – and to pressure exerted on municipalities to address shortages and provide more affordable housing. Still, with high mortgage rates and inflationary prices for building materials, Nanayakkara-Skillington expects growth in the multifamily market to stabilize within a few years, with the number of new housing starts declining by 8% in 2023 and an additional 5% in 2024.

Tips for saving for a home

Since buying a home is such a big purchase, starting to save five years in advance makes perfect sense. Here are some strategies for getting your finances in shape for down payments – you want to be able to cut the usual 20%, to avoid the added cost of mortgage insurance – and of course for mortgage pre-approvals.

1. Think about making money

Of course, you work for love, not for money. But money is important too. Find the right way to ask your employer for a raise or be prepared to look for other opportunities – it’s usually the quickest path to a meaningful raise. Sixty percent of workers who changed jobs in the past year earned more money in their new roles, even after taking into account the rapid pace of inflation, according to a recent Pew Research Center study.

2. Reduce your debt

Being able to buy a home isn’t just about growing your bank account. It’s equally important to focus on paying off the amount you owe on credit cards, student loans, and car payments. By lowering your debt-to-income ratio (DTI), you’ll be in a better position to qualify for a mortgage down the line.

3. Keep in mind the hidden costs of buying a home

The purchase price is the big expense, but buying a home has other less obvious expenses. You will also need to be prepared to pay closing costs – lender fees, property taxes, appraisal fees, and various other administrative and professional fees. These add up quickly. In 2021, the average closing cost was $6,905, according to ClosingCorp.

Because you’ll be spending several thousand dollars on closing costs, it’s imperative to stay in a home long enough to break even (let alone make a profit). If you buy a house and sell it a year or two later, you’re probably not going to come out on top. Five years is the usual duration.

4. Focus on local, not national markets

Yes, many publications (including ours) are full of generalizations about “the housing market”. But real estate markets are hyper-localized, varying widely not just from region to region, but from state to state, and even within states. Costs, prices and requirements will be very different in Pensacola than in Palm Beach, for example. When thinking about budgeting for a home, keep broader national trends in mind, but it’s more helpful to focus on housing market conditions in the city and even the specific neighborhood you’re looking to rent. buy or move. Try to target the most affordable, where your housing dollars will yield the most.

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