In recent years, the real estate market has taken us on a rollercoaster ride. From a red-hot market with record-low interest rates and frenzied bidding wars, we’ve now arrived at a point where mortgage rates have surged to levels not seen in over two decades. To put it in perspective, the average rate for a 30-year mortgage has more than doubled, climbing from a modest 3 percent in August 2021 to a substantial 7 percent in August 2023. Unsurprisingly, this surge has led to a slowdown in buying activity.
**Current Market Snapshot**
**Prices and Inventory:** The median existing-home sale price in July 2023 hit an all-time high at $406,700, as reported by the National Association of Realtors (NAR). New-construction homes weren’t far behind, with a median sale price of $436,700 in July, according to the National Association of Homebuilders (NAHB). Despite the surge in prices, the supply of homes remains limited, with existing homes showing a 3.3-month supply in July, still below the 5- to 6-month supply indicative of a balanced market.
**Days on Market:** With higher mortgage rates impacting affordability, homes are staying on the market longer. In July, the median time homes spent on the market was 20 days, a significant increase from the 14 days noted in July of the previous year.
**Sales Activity:** The number of existing homes sold nationwide dropped by over 16 percent year-over-year in July. In contrast, sales of new single-family homes rose by 4.4 percent from June to July, based on NAHB data.
**Mortgage Rates:** As of late August, Bankrate’s national survey of large lenders reported an average 30-year mortgage rate of 7.32 percent, reaching levels unseen since 2001.
**Forecast for Mortgage Rates and Types**
NAR’s Chief Economist, Lawrence Yun, anticipates that mortgage interest rates could continue to rise, hovering around 7 percent for the remainder of this year and most of 2024. Within two years, Yun predicts the rates will begin to stabilize, returning to a range of 5.5 to 6 percent. While high rates may drive an increased interest in adjustable-rate mortgages, Yun envisions a return to the traditional 30-year fixed-rate mortgage for the majority of Americans after 2024.
**Predictions for Home Prices**
Yun foresees limited fluctuations in national purchase prices in the coming year, with minor variations of around 5 percent. The exception lies in California, where he expects a potential 10 percent decline due to the sensitivity of its market to interest rate changes. This shift is already evident in high-end areas like San Francisco, where median home prices have dropped by 9.71 percent since the previous year. Overall, Yun predicts a total price appreciation of 15–25 percent over the next five years.
Bankrate’s Chief Financial Analyst, Greg McBride, foresees low- to mid-single-digit annual appreciation in home prices over the same period, aligning with the long-term average of home prices outpacing inflation by a slight margin.
**Market Stability and the Housing Crash**
Despite some market characteristics reminiscent of a bubble, Yun believes that a housing market crash is unlikely. While he anticipates sales to reach a low point next year, with only 5.3 million units sold, he foresees a gradual increase, reaching an annual rate of 6 million units by 2027. Yun points out that even if home prices decline by 5 percent (or 10 percent in California) in the coming year, this doesn’t constitute a crash, which typically involves a one-third drop in prices. He emphasizes that a crash occurs due to oversupply, a condition not currently met with limited inventory. Yun predicts that the housing supply will find equilibrium within five years.
**Shift Towards a Balanced Market**
Yun expects the seller’s market to persist as long as housing inventory remains scarce. However, within five years, he anticipates a transition to a more balanced market, where buyer and seller advantages are more evenly distributed and vary depending on individual circumstances.
**Market Insights: Building Locations and Types**
The shift towards hybrid work schedules and less reliance on commuting is expected to bolster the suburban housing market. Growth is anticipated in areas with rising populations, including the Carolinas, Florida, Texas, and Tennessee. Notably, 50 percent of new single-family construction is occurring in the South, according to NAHB data.
In contrast, the number of single-family homes under construction decreased at the end of 2022, while multi-family home construction has been on the rise in recent years. This trend is driven by lower price points and the need for more affordable housing solutions. Nevertheless, high mortgage rates and rising building material costs are expected to stabilize the growth of the multi-family market, with a projected 8 percent decrease in new housing starts in 2023 and an additional 5 percent decrease in 2024.
**Preparing to Buy a Home**
Buying a house is a significant commitment, often requiring long-term financial planning. To prepare for homeownership by 2028, consider these strategies:
1. **Enhance Earning Power**: Seek opportunities to increase your income through job changes or negotiating for a raise.
2. **Reduce Debt**: Focus on paying down existing debts, such as credit cards, student loans, and car payments, to improve your debt-to-income ratio.
3. **Improve Credit Score**: A higher credit score can secure better mortgage rates. Pay bills on time and work to boost your credit score before home shopping.
4. **Local Market Focus**: Real estate is highly localized; concentrate on conditions in your target neighborhood. Collaborate with a knowledgeable local real estate agent to navigate the intricacies of your specific market.
In conclusion, while the real estate market has experienced significant shifts, thorough planning and market understanding can position you for success in achieving your homeownership goals.
