Housing prices — a four-year forecast

The forecast in the graph above, done by The Federal National Mortgage Association (aka Fannie Mae), predicts that housing prices will grow roughly 20.8% over the next four years. Their optimistic prediction has housing prices growing 32.9%, while their pessimistic take has prices growing only 8.7% by 2028. The most promising part of this prediction is how steady the growth would be — a sign of a stable housing market that has found a balance among some volatile conditions.

Let’s break down the forecast.

From September 1996 through September 2022, the median home price went from $112,230.80 ($213,963.97 adjusted for inflation) to $381,471.31 ($386,653.42 adjusted), which works out to roughly 2.99% annual growth on average.^Footnote2 Of course, that 27-year span includes both the housing boom of the early 2000s and the subsequent crash, and shows how those spikes and valleys tend to even out in the long run.

The Fannie Mae forecast shows an average growth of 4.13% over the next four years,^Footnote1 so that’s significantly better than the annual average over the past 30 years or so. And, in the same way that the housing boom and crash of the early 2000s created highs and lows that eventually smoothed out, the prediction for the next few years smooths out the volatility caused by the pandemic and the ensuing inflation.

Of course, housing prices alone only tell part of the story.

Mortgage rates play a huge part in the monthly payment for a home. With a 7% mortgage rate, a homeowner with a $400,000 loan will pay around $2,650 each month (before taxes and fees). If the mortgage rate drops to 4%, that same $400,000 loan now costs about $1,900 each month — a 28% reduction.

Though interest rates and mortgage rates are not directly connected, the former tends to have a big influence on the latter. At the end of 2023, the Fed promised to reduce interest rates three times in 2024,^Footnote3 yet rates have remained mostly stagnant for the first half of 2024. At this point, if the Fed does reduce interest rates, it will likely only be once near the end of 2024. If interest rates hover throughout the year, mortgage rates are likely to follow suit.

Another key factor is housing inventory. Because so many homeowners are locked in at sub-5% and sub-4% mortgage rates, housing inventory remains low — a little less than three months’ worth, as opposed to the five-to-six-month stock found in a balanced housing market. That low inventory makes the existing homes for sale more valuable than they would be in a typical market, leading to overbidding and bidding wars that inflate the sale price.

If the inventory goes up significantly, or mortgage rates drop significantly — or both — housing prices may cool off from the rapid rise we’ve seen since the beginning of the pandemic.

Ongoing litigation may change the commission structure for real estate agents moving forward. Some economists predict agent commissions could be reduced by as much as 30%.^Footnote4 If that change does occur, the savings passed on to sellers could help decrease the home inventory shortage as more homeowners put their homes on the market.

One final factor to keep in mind is wage growth. If wages stagnate, then prospective homebuyers’ purchasing power dips. If wages rise steadily, that purchasing power increases, and more homebuyers will be able to enter the market.

Because of the low inventory, this will remain a seller’s market, at least in the short run. A rise in existing inventory, a significant boost in new home construction, and a reduction in mortgage rates would level the playing field a bit, but sellers are unlikely to find themselves in a buyer’s market for the foreseeable future.

Sellers should price their homes with confidence, looking at the comps in their neighborhood but also not fearing overpricing. As of the end of May 2024, the average days on market for a home is 14.^Footnote5 So, if a seller prices their home a bit too high, they’ll know it if they haven’t gotten at least a handful of bids in those first two weeks, and can drop the price. This is a better strategy than underpricing in the hopes of being competitive — and potentially leaving money on the table.

While this is a challenging time for many prospective homeowners — especially first-time homebuyers — all is certainly not bleak.

The high mortgage rates keep housing prices in check, and most predictors indicate mortgage rates will come down to the mid-5% mark in 2025 or 2026, meaning that a home bought today could be refinanced in the next few years and the monthly mortgage payment would likely drop by hundreds of dollars.

And while the steady rise in home prices can frustrate potential buyers before they enter the market, the overall trend of rising home prices reinforces the fact that owning real estate remains one of the soundest financial decisions in terms of return on investment.

New home construction, once considered an extravagant option, is becoming a very attractive choice in 2024. In May 2024, the median sale price for a new construction home was $417,400 — $1,900 less than the median sale price for existing homes.^Footnote6 If new construction remains cheaper than an existing home, a lot of prospective buyers will turn to this option. Add to that the incentives offered by many home builders — including covering closing costs, free upgrades, special financing and Good Builder Warranties — and new construction may be the most savvy choice for buyers in 2024.

The fact that housing prices have continued to rise steadily despite high mortgage rates, high inflation, and low home inventory is a testament to the resilience of the housing market. That resilience in the face of so much volatility and uncertainty makes buying a home one of the more prudent financial decisions a consumer can make — and that seems unlikely to change in the near future.