Key Takeaways:
- Home sales will remain constrained as long as mortgage rates stay over 6% but are expected to rise as mortgage rates and inflation decline.
- Home prices will mostly hold their value in the short term due to lack of supply, but that could vary between markets due to local fundamentals.
- Rental growth should flatten out as more supply hits fast-growing markets but will rise faster for single-family versus multifamily units.
- Mortgage rates will likely range from 6%-7% unless there is a recession, but short-term lending rates will start gradually falling by late 2024.
Over the next five years, as some trends accelerated by the COVID-19 pandemic begin to wane, other factors including changing demographics, the rising costs of climate change, an increasingly unstable world and the expansion of AI into the greater economy will also gain importance. If the housing market gradually unfreezes, as mortgage rates slowly decline from the highs of 2023, the hottest housing markets in 2029 may look a bit different from a similar list in 2024.
Our data is sourced from several authoritative sources, including the U.S. News Housing Market Index, an interactive platform providing a data-driven overview of the housing market nationwide.
Housing Market Will Likely Thaw in 2025, But Sales Will Remain Low
Home sales are expected to remain constrained as long as mortgage rates remain well over the 6% to 6.5% level. According to the most recent economic projections from June, the Federal Reserve doesn’t see inflation subsiding to 2% on a consistent basis until 2026, which could mean higher but declining short-term interest rates for the next two years.
Still, if the battle against inflation is viewed as heading in the right direction, the Fed could start lowering its federal funds rates as early as September, setting 2025 up for more robust housing sales if the 10-year bond rate, which influences mortgage rates, also falls. Nonetheless, with over 86% of homeowners with mortgage paying rates under 6%, they’ll have to get closer to or below that level to entice more owners to sell.
One bright spot for homebuyers could be a growing supply of newly built homes, with supply for new single-family homes rising to 9.3 months in June – more than 2.5 times the level of existing single-family supply. Since completed homes are costing builders money to hold as inventory, ambitious buyers shouldn’t be shy about asking for more generous sales discounts and incentives such as interior upgrades and mortgage rate buydowns.
Newly Built Homes Will Continue to Provide Critical Supply, But Will Quality Suffer?
It’s a fair question. With newly built homes making up about 30% of overall housing inventory in recent months – or more than double its usual share – more buyers are considering the advantages of new construction. However, according to Cy Porter, a social media-savvy home inspector in Phoenix, sloppy building practices suggest that buyers should hire their own third-party inspections before moving into a newly built home, or at the very least call them while the initial warranty period is still in effect.
Housing starts jumped from under 1.3 million in 2019 to 1.6 million in 2021 before settling back to an annualized rate of about 1.4 million in June, while the construction industry is reportedly short of up to 500,000 workers. Maintaining quality standards on multiple sites in different geographic regions is a challenge for even the best-run homebuilders, with sufficient and qualified labor at the ready. But is hiring a third-party inspector for a newly built home really necessary or an optional expense? That answer seems to depend on who built the home, how many they build and the warranties they offer.
Don Neff, president and CEO of LJP Construction Services, a third-party construction quality assurance company operating throughout the U.S., says while he was "aghast and surprised” to see some of the errors uncovered by Porter’s YouTube videos, most of them seem to be related to the final "fit and finish” details that are completed near the end of construction. Instead, Neff’s company starts with "foundation work, through detailed inspections for rough trade work,” a category which includes the major components and systems that form a newly built home. "The key is to catch things before they’re covered up,” he says.
According to research by LJP on more than 2,000 new residential developments, the most common causes of construction issues include deficiencies in field workmanship, misinterpretation of plan details and deviations from manufacturers’ recommendations. Yet despite all the opportunities to make mistakes in the field, LJP found an average deficiency rate of just 4% for all building types, including 3% for single-family homes and 6.5% for multifamily buildings.
Another way to determine quality is to survey recent buyers of newly built homes. Eliant, a customer-experience management firm focused on the residential building arena since 1984 and the parent of the annual Homebuyers' Choice Awards, currently surveys up to 100,000 such owners for 230 homebuilders in 37 states. Although Bob Mirman, CEO of Eliant, admits that overall homeowners’ ratings of new-home quality fell to an 82% satisfaction rate in 2022, they have since recovered.
"Mostly, we recognize that the post-Covid supply chain issues and insufficient numbers of and poorly trained trades were the real contributing factors,” Mirman wrote via email prior to a telephone interview. "However, quality ratings made a dramatic recovery in 2023 and have continued this strong upward trend in 2024.”
So far in 2024, through June, Eliant has found a national satisfaction rating of 88.5% by owners of newly built homes – the highest level since 2011 and an 8% improvement over 2022. As for inspections of new homes, Mirman says the right time to do so is "right after move-in and under warranty, unless there’s a real issue you’ve seen.”
When is a third-party inspection of a new home a good idea? Generally, when buying one from a smaller, "mom and pop" builder not offering the same type of comprehensive warranties more common with larger production builders, as well unique, custom homes. For builders wanting to offer warranties, the National Association of Home Builders recently released the third edition of "Warranties for Builders and Remodelers” to "help them avoid costly mistakes.”
How Sellers and Buyers Pay Commissions to Agents Will Change
In March, the National Association of Realtors settled several lawsuits, making it easier for homebuyers to negotiate fees with their own agents (or do without them completely), which is scheduled to go into effect on Aug. 17 but still must be officially approved by a federal judge in November.
However, the U.S. Justice Department recently indicated that if the existing settlement is insufficient, it could ask for more substantial changes to the transaction costs of buying and selling homes and remove the ability for sellers' agents to explore loopholes, such as offering commissions for buyers' agents on social media or other online sources separate from various MLS systems.
According to analysts at investment bank Keefe, Bruyette & Woods, the proposed changes could save Americans up to 30% of the estimated $100 billion they pay each year in residential real estate commissions. That, in turn, could lead to lower listing prices by sellers better able to offer a good deal in exchange for a quick sale. However, buyers choosing to forgo their own agents would also be at a higher risk for overpaying for properties or failing to understand other factors related to a transaction, including inspections, closing costs and various contingencies.
Total Cost of Ownership Will Become a Key Metric
Besides purchase prices and mortgage rates, other variable costs including property taxes, HOA fees, maintenance, adapting to a changing climate and especially higher insurance premiums will become a more popular barometer of total costs than just principal and interest payments alone. According to a recent study by Bankrate, these annual variable costs for a typical single-family home rose by nearly 26% between March 2020 and March 2024 to over $18,000 per year.
During this four-year period, the cost to finance the median-priced single-family home at prevailing mortgage rates more than doubled to $2,278 per month. Add to that monthly maintenance costs of $1,510 per month, and the total cost of ownership has risen nearly 64% over the past four years to approach $3,800 per month.
Meanwhile, although the cost of renting a typical single-family home during the same four-year period rose 16.6% to $2,236 per month, because the costs of maintenance to property owners rose by almost four times as much, for now renting is clearly much more affordable than owning. This makes the total cost of owning the typical single-family home almost 70% higher than renting.
Population and Immigration Trends Returning to Prepandemic Patterns
According to new Vintage 2023 population estimates released by the U.S. Census Bureau, with the COVID-19 pandemic heading into the rearview mirror, national population trends are returning to prepandemic patterns, including fewer deaths and the South dominating this growth.
Throughout the year, the nation gained more than 1.6 million people, and more states experienced population growth in 2023 than they did since the start of 2000. While the South did account for almost 90% of the annual increase, the West made up most of the balance, with slight increases in the Midwest and a small decline in the Northeast.
Politics and Foreign Affairs Could Increasingly Impact Consumer Sentiment Toward Large Purchases
If national and global politics become increasingly unstable, likely consumers will be more hesitant to spend on large-ticket items such as homes and cars unless they’re urgent purchases. At the World Economic Forum earlier this year in Davos, Switzerland, four primary concerns were addressed at the 54th annual gathering of government and business leaders: the rise of AI, potential impacts from climate change, crucial elections across the globe and an increasingly unstable world characterized by hotspots in Eastern Europe, the Middle East and Asia.
Certainly, an assassination attempt on a presidential candidate on American soil – thereby adding the country to the global hotspots list – only adds to this anxiety.
However, some of the negative impacts from these trends could be transitory. If AI is viewed as a positive contributor to increasing productivity and wages, if the world is able to work better together to address the various impacts from climate change, if elections are fair and if conflicts in and between countries are contained, then consumer sentiment could improve.
Hybrid Work Schedules Are Likely Here to Stay
According to Kastle System’s Back to Work Barometer for the country’s 10 largest cities in the last week of June (and prior to more workers taking vacations in the first half of July), 51.4% of office space was occupied based on the digital tracking of employees entering offices and businesses. While certainly an improvement from the 15% rate estimated in mid-March 2020 and consistently improving over the last 2.5 years, it’s still substantially below national pre-pandemic levels.
Moving forward, recent research from Stanford economist Nick Bloom suggests that employers are planning for an average of 2.2 work days from home for those workers who can do so. However, hybrid employees generally prefer a higher share of remote work, averaging another 0.5 days per week or 2.7 days in total. Assuming there’s a future compromise closer to 2.5 days per week split between in-office and remote work, that "new normal" could continue to exert compelling influences on both the housing and office markets.
There Will Be Changes in the Ways Homes Are Built
AI is likely to usher in a multitude of new homebuilding production methods that have struggled to gain traction. Whether it will be through the use of 3D printing, using more factory-built structural components or leveraging software to minimize material waste, look for AI to help boost building quality while also speeding up construction timelines. Property insurers will also exert more influence on the way homes are built, especially when guarding against threats such as wildfires, floods and hurricanes.
The National Housing Shortage Will Last Through the End of the 2020s
With the estimated pent-up demand for housing ranging widely from 1.5 million to 7.2 million units, even if the nation’s builders are willing to produce the supply, it still takes time to find suitable land, skilled labor and materials. While the National Association of Home Builders expects this pent-up demand to be supplied between 2025 and 2030, unless the post-pandemic rebound in immigration continues, changing demographics by 2030 will result in lower demand for new housing.
National Housing Market Predictions for 2025-2029
Following is a summary for year-end 2024, 2025 and predictions for the housing market through 2029. Although a recession is no longer predicted, economic growth is expected to decline from 2023’s fairly robust rate of 2.5% to 2.1% in 2024 and 2% in 2025. However, should the country enter a recession, these predictions would change accordingly.
Home Prices: After rising 1.8% in 2023 and jumping 5.8% year-over-year through May 2024, home prices are forecasted to flatten out as more listings are added to the market and rates remain relatively high. By 2025 through 2029, given the large run-up from 2021 through now, home prices are predicted to rise more gradually at a percentage point or so above the rate of inflation, for an estimated increase of about 17% from 2024 levels.
Home Sales: After falling sharply in 2023 to the lowest level since 1995, existing home sales are predicted to rise in 2025 as mortgage rates decline and will continue rising through 2029. Sales of new homes, which continued to increase in 2023 due to builders’ ability to buy down mortgage rates to boost affordability, will expand on those gains throughout 2029 but continue to be limited by competition for buildable land and skilled labor.
Home Rents: After rising sharply in 2021 and 2022, home rents continued to rise through May 2024 at a more moderate pace, largely due to those markets that have seen a huge jump in supply. For 2025, rents are expected rise more for single-family homes than multifamily units. By 2029, rent increases are predicted to track inflation rates but rise more quickly for single-family homes.
