The forecast for the national housing market over the next five years

It’s been a wild real estate ride over the last few years. After a red-hot market characterized by bidding wars, low interest rates, and elevated prices, mortgage rates increased to the highest level in 20 years, leading to a slowdown of both buying activity and purchase prices.

Yet, with inventory still low, home price tags remain high, including in the Philadelphia region.

There are plenty of predictions about where the housing market is going in 2023. But what about further out? After all, buying a home often requires long-term planning. We asked several residential real estate experts for a five-year forecast of the housing market. Here’s looking at you, 2027.

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

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

Inventory: Though higher than it was in January 2022, the supply of homes remains historically low, says Lawrence Yun, NAR chief economist and senior vice president of research. 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 number of days on the market for sold homes ranged from 13 to 23, depending on the price, according to the September NAR data. In a more typical market, it’s 45 days, Yun says.

Homes sold: Fewer existing homes are selling nationwide. According to the September NAR data, during 2022, the seasonally adjusted total figure dropped from 6.49 million in January to 4.71 million in September. Meanwhile, sales of new single-family houses in July 2022 were at a seasonally adjusted annual rate of 511,000 — which is 29.6% lower than in July 2021, says the U.S. Census Bureau and the Department of Housing and Urban Development.

Thirty-year mortgage rates: According to Freddie Mac, as of Nov. 10, the current average 30-year fixed mortgage rate was 7.08%, the highest it’s been in 20 years.

New home starts: According to Nanayakkara-Skillington, the seasonally adjusted annual rate for new single-family home starts is 892,000, which is down 18.5% compared with last year.

Mortgage interest rates could continue to increase for a few weeks or months, says Yun, adding that 7% looks to be the level for the rest of this year and most of next year. Within two years, the rate should return to 5.5% or 6%, he adds. Nanayakkara-Skillington agrees, predicting that rates will drop to about 6% by the middle of 2024.

Yun foresees no or minor changes in purchase price tags on a nationwide basis next year, with increases or decreases of about 5%. The only exception is California, he says, where the market could see 10% declines: “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% to 25%.

While it’s been showing bubblelike properties, the residential real estate market should not violently pop, Yun expects. Although he predicts that sales will be at a low point next year, with only 5.3 million units sold, he foresees a gradual increase afterward, up to an annual six million units by 2027.

Despite the higher mortgage rates, home prices are still above what they were one year ago, he adds. Even if they decline 5% next year, that’s not close to crashing — which is characterized by a one-third drop.

“A 30% decrease will not happen because there isn’t enough inventory,” he says. “A crash happens with oversupply.” He believes the housing shortage will continue this year, with the supply balancing out by five years.

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

Caroline Feeney, executive editor, HomeLight, feels the shift away from a seller’s market has already begun. According to a recent survey the company conducted, 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.

With hybrid work schedules becoming the norm and commuting no longer as relevant, Yun predicts that the suburban market will continue to be strong. Meanwhile, 55% of top HomeLight agents believe the markets that heated up the quickest during the pandemic (including Austin, Phoenix and Boise) are likely to be the first to cool down and see the biggest decreases during a market correction, says Feeney. Yun expects growth in areas with rising populations, namely the Carolinas, Florida, Texas and Tennessee. Backing up his prediction, 50% of new single-family construction is in the South, notes Nanayakkara-Skillington.

The number of single-family homes under construction has decreased over the last four months. In contrast, the number of multifamily homes under construction has increased over the last few years, says Feeney, who credits this growth in part to their lower price tags — apartments tend to be cheaper than detached houses — 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 multifamily market’s growth to stabilize within a few years, with the number of new starts decreasing 8% in 2023, and another 5% in 2024.