5 Year Forecast for the Housing Market

What does the market crystal ball indicate about the 5 year outlook for US residential real estate markets?

As the information below points out, the market is at its worst in 2024, mirroring 1992 numbers. Now it’s in waiting for a release from the shackles of high interest rates, low supply, building regulations, and uncertain buyers and sellers.

However, beginning in 2025, Americans may be able to put it all in the past, and slowly move forward, sell their home and buy a home.  Yet, there is geopolitical uncertainty, and concern about the Nov 8 elections. The election is pivotal as the Republicans would push for a faster drop in rates, ease building restrictions, cut taxes, and ease supply of building materials. With this, builders would get financing again and begin building.

The Dems are making promises, such as rent controls and confiscating control of all US land, but if the Republicans win the Senate and House, they won’t be able to enact those election promises.

An optimistic view has it that by 2026 to 2028, new construction will begin to satisfy demand for homes thus easing more of the latent demand. Millions want to sell but are locked in at their pandemic era low mortgage rates. The net effect will be a wave of listings that likely will take prices down in the next year, then rise through 2026 as the economy surges.

Overall, the housing market looks like it has some good years ahead.

Experts were pretty certain home prices would fall in 2024, but that didn’t happen.  The FED didn’t drop interest rates either so the housing economists didn’t enjoy a good year for predictions.

Last November, NAR Chief Economist Lawrence Yun predicted a strong rebound for housing in 2024, with a 10% jump in home sales and a 5% increase in the national median home price. 2024 is not done, however, this projection seems highly unlikely.

Most forecasts were predicated on a much lower FED rate which didn’t happen.  And it’s not 100% certain it will happen.

No Acknowledgement of US Government Spending

The issues were that few forecasters and economists were honest about the amount of stimulus spending that had been injected and would continue in 2024. It’s massive liquidity remains to drive up consumer prices overall and push this mounting tidal wave that created its own pre-tsunami sales pullback via anti-inflation interest rates.

This unexpected summer pullback will only add more force to the coming housing sell off.

It was a political thing that’s skewed projections and made all predictions seem naive and to miss the mark.  First, the insistence that there wasn’t overspending, no problem at the southern border, and that geopolitical wars would not result, and the fact politicians wouldn’t focus on building housing, reducing taxes, lowering rates and reducing regulations.

The political narrative then was the basis of most forecasts and in many cases still is. Most organizations have given up on home prices and sales forecasts, because they’ve lost credibility.

The banks however did lower mortgage rates from their lofty, unaffordable 8% heights, but lending standards became stricter.  Other than some refinancing, the drop hasn’t spurred sales or new construction, but just gave media outlets something to talk about.

Will 50 Basis Point Cut Matter?

Now, once again we’re expecting a drop in rates, for September. But the lowering of rates will have its upsets as inflation will likely return by spring 2025. NAHB’s Jim Tobin, in an interview with Fox Business, explained that shelter inflation is tough to ease. And homebuilder confidence is very low right now at 43. In fact, with the economic growth expected in the next 5 years, home prices will likely not recede. New home construction has declined after a big year, and the shortage of homes will be a persistent problem going forward.

Zillow estimates that the US is short by 4.5 million homes. And that was before the bulk of illegal migrants entry over the southern border. And 2024 has seen the worst home sales since 1992 when the population was 256 million vs today’s 340 million.

So with that, and an improved economy bolstered by US protectionism, AI supremacy and tech led economic rebirth, cheap convention energy, huge buying demographic demand, and there is likely going to be a housing sales boom in the next 5 years.

Both Goldman Sachs and Moody’s Analytics believe home prices will rise in the next 5 years, however, Moody’s sees only moderate growth between .3% to1.7%. Golman Sach sees home prices rising 3.8% this year, followed by 4.4% next year, and up 4.9% in 2026 and 2027.

Corelogic Price Forecast

For the next year, Corelogic sees only a 2.3% price growth over the next 12 months. They believe the pace of price growth is continuing to cool, and rate cuts won’t be enough to rekindle it. Zillow believes home prices will drop 1.5% by next year.

On that note, the current unbalanced housing market is mostly hampered by political factors such as excessive government spending, real estate zoning laws, building regulations, high interest rates, manufacturing repatriation from Asia,

Current Outlook:

• home sales will be constrained by 6+% mortgage rates for 2025
• house prices will hold due to lack of supply
• new construction will begin again in 2026 with low rates trying to play catch up
• sales will grow as market unthaws in 2025
• inflation will be sticky and mortgage rates won’t fall to 4% till 2026
• economy will falter slightly making buyers more cautious
• millennials and Gen Z’s will be eager to buy in the coming 3 to 5 years
• economy could boom if a Trump government wins on Nov 8th

New Home Construction: Playing Catch Up

The lack of supply is the story of the US housing market and will be for the next decade. Housing completions were pushed through in 2024, but new projects are curtailing fast.

What Crushed the US housing Market?

• fast rising mortgage rates discourages transactions of any kind
• intense demand has pushed home prices up too high
• housing development resistance (NIMBYs and anti-development local governments)
• homeowners won’t sell because of low supply and high refinancing rates
• high costs of developable land
• high cost of labor and materials
• high taxes on real estate transactions
• fear of recession has stopped buyers in their tracks
• expectations of coming lower prices makes buyers wait patiently
• fears of a recession

What would change in 2024 to 2028?

The FED will lower rates starting in late 2024 making it easier for those refinancing and for those wanting to buy, particularly 20 to 50 year old buyers.  By spring 2025, home sellers won’t fear selling as prices will still be strong. However, refinancing their next home will still be an issue, as they’re refinancing well above their previous 3%. On mortgages for expensive homes, it’s a stopping point. But for less expensive regions of the country, buying and selling might be doable.

For the next 6 months the economy will suffer with rising unemployment, low investment, and consumer pessimism.

Here’s the points that support a good forecast in the spring of 2025 and next 5 years

• debt ceiling deal is reached with a huge spending budget for the Democrats
• oil and commodity prices may fall dramatically
• FED eases interest rates by 2% allowing mortgage rates to fall
• November 2024 election looking positive for President Trump and his Trump trade economic boost
• corporations, mid caps and even small caps will have cut operating expenses and liabilities creating a much cleaner balance sheet
• stock market makes a rotation into small cap stock finally breathing life into America’s small businesses launching a boom in US employment, and likely, more inflation
• with more business activity, business borrowing, and more jobs, more Americans will rejoin the workforce with better pay
• bankruptcies will have cleared out much of the uncompetitive businesses, or they’re bought out
• US grows its leadership in AI and microchips creating big costs savings for large companies
• China’s economy fails creating much lower prices for imports
• Corporations have lots of cash and will be cautious for the next 12 months, and then begin to open up in 2025
• AI and automation are cutting costs and will make a big contribution to GDP in the next 5 years
• homeowners will sell by 2026 because they can refinance to buy somewhere else
• building permits and home starts will grow as mortgage rates and interest rates drop
• millions of new immigrants landing new jobs will want homes and multifamily dwellings
• tens of millions of Gen Z’s and Millennials still intend to start families, grow families and buy a home

So we know there are some strong catalysts for the economy and for the housing market.

Zillow Home Price Forecast Next 5 Years

 

If new housing isn’t built, then selling a home doesn’t seem intelligent, and sellers have nowhere to go. Most won’t tolerate the uncertainty in the next 5 years. And since housing construction won’t catch up for at least 5 years, prices are going to stay elevanted.  NIMBY and local government anti-development regulations will ensure supply will lag.

Does Buying a Home Within 5 Years Make Sense?

The fact you can’t afford the lofty prices in your city might be your saving grace. And home prices likely won’t fall, unless some government action brings the house of cards tumbling down. That could happen given economies are far too complicated for them to comprehend.  And remember when Janet Yellon and J. Powell said inflation was transitory.  Incompetence at the level is a threat to the economy and the housing market.

As home prices surpass their peak levels, you might be wondering if buying is a good investment. Will the housing market crash and will the stock market crash? Either event might ruin your personal wealth this year. 2007 wasn’t fun. The stock market is heading toward a bottom.  The S&P forecasts are not positive.

A look at the 6 month housing forecast is wise, and looking forward with an open mind to the next 5 years is wiser. So where would you start investigating the long term outlook for the US housing market, when such information may not be available? Fortunately, I’ve done some of the research work for you.

We need a continuous prediction of the market in years 2023, 2024, 2025 to 2028 that includes demand estimates and supply estimates. It really is a demand vs supply issue, funded by estimates of economic growth, employment, wages, savings, and more.

If you’re thinking a housing market correction couldn’t happen, consider that when the economy sours, many Realtors will advise their clients to sell, sell, sell. They’ll over do it, in order to look smart and prescient. The markets really are emotionally loaded. It won’t take much to start a cascade of selling to unload stock or housing, after they’ve reached the peak.

Once values stop appreciating, investors lose interest and buyers will then wait until they bottom out. This colors the 5 year housing market forecast — as fearful people bail out of investments with no future.

5 Year Housing Market Outlook

The President’s multi-trillion dollar stimulus packages have injected hundreds of billions into the economy.

That’s a huge injection of funds into housing and into American savings accounts. It’s money in stock markets and 401k’s too.  A large pool of money available when the recession eases and buyers won’t hesitate to big because demand is high and builders aren’t all that busy.

Real estate is a solid bet for at least 10 years.

Immigration and Gen Y and Gen Z housing demand will push home prices ever higher. And of course, funds will flow into the DOW, NASDAQ, S&P and Russell 2000 as businesses benefit from this economic recovery. GDP is growing fast right now and could reach 10% by the end of 2021.

The outlook for the housing market to 2026 is rosy, especially for sellers. Financing looks good and plentiful, housing construction will pick up, and there are endless buyers, especially for single detached homes.

Housing Market Trends to Watch

• unemployment moves up a little
• GDP slows this year but rises again in 2024/2025 as interest rates fall
• lending criteria for banks will stay tight but loosen in 2025
• rates may rise in June slightly given April’s inflation rate was higher and FED wants to stick it to the US economy
• work from home will remain a major trend but most will head back to head offices where they may be laid off
• government spending will stay steady through 2024 but drop in the next 5 years
• M2 money supply is shrinking fast constraining funds for real estate purchases
• supplies of steel, copper, lumber, plastics will slowly rise as manufacturing and home building return in 2024
• the number of home renters will grow strongly (home ownership too expensive)
• inflation will remain around 5% for 2023 then drop slowly in 2024
• new President will open up competition in markets thus causing prices to fall
• mortgage defaults will grow this but not be out of control (higher interest rates)
• home prices will continue rising through 2023 due to a lack of supply
• listings and inventory will grow slightly from this point forward
• friction with China will grow and tariffs will increase against China imports
• personal income and wealth will stay level and support the economy
• money will move away from low performance money markets and back into the improving equity markets
• builders will enjoy reduced labor and materials costs in 2024
• new President will open up land for development and reduce red tape which will push money to the builders
• new President will lower energy costs which will aid manufacturing and transportation thus lower consumer prices
• consumers will spend again in 2025 with more confidence in the next 5 years

Which US States Will Surge?

As this chart below shows, Texas is in for dramatic growth for many years. Its zero income tax, energy wealth, growing IT industry, and agricultural production will make it the top US state. Tennessee, North Carolina, Utah, Iowa will grow with Florida more moderate, while California, Washington, New York and other high cost states will flat line.

High costs, high crime, and high taxes in states such as California, New Jersey, New York, Oregon, and Illinois will bring immense pain to residents of those states.  They will move out of those states for lower costs and greater supply of housing elsewhere, perhaps Florida, Texas and North Carolina. A migration continues, which means more construction of homes.

Change, high costs, human dreams and technology: creating new demand that should last all the way to 2030 when supply might finally catch up.

Key Statistics in Charts:

Economic growth outlooks for the next 5 years, primarily because of strong latent demand, demographics, and continuous infrastructure stimulus spending. This forecast sees an extension of current trends, so you can expect growth triple to what is predicted in this graph below.

Average Home Prices in Ten Years

By 2030, home prices will have risen substantially, and no one expects the price of real estate will decline. Land is a precious commodity. We will see digital technology make remote work more common. Living in the cities won’t be necessary, but most home buyers don’t buy far from where they and their families live. And that is what pushes prices higher in the cities.

Mortgage Rate Outlook

Interest rates are expected to fall in 2023 and should be back at low numbers by end of 2024. As the economy is suffocated, it will need some relief. No one is forecasting mortgage rates however the CBO is projecting persistent interest rates in the neighborhood of 3% to 2030.

Housing Construction 5 Year Forecast

Statista isn’t quite as optimistic about housing construction.  As the Census.gov report shows, it’s all downhill right now, yet falling rates in 2024 should ease the construction losses.  Yet demand will persist and there is some political pressure to ease the housing shortage.  When rates are eased, we’d expect construction numbers to rise.

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