Housing Market Predictions for the Next 5 Years

Over the next five years, look for several important trends accelerated by the COVID-19 pandemic to begin having lasting impacts on real estate and land use, many of which will impact the demand and supply in regional housing markets. Whether due to emerging technologies, changing demographics, the state of local job markets or the rise of remote work, the list of the hottest housing markets in 2027 may look a bit different from a similar list today.

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. See the U.S. News Housing Market Index.

2023 Will Bring Continued Uncertainty for the Housing Market

As we enter 2023, it’s reasonable to feel disoriented about the state of the economy and the housing market. Since we’re likely still in the remaining innings of a global pandemic of historic proportions, economists offering glimpses into the future seem to agree on only one thing: continuing uncertainty.

That’s mostly because when economists create their forecasting models, they’re relying on past performance – and the more data, the better. But what happens when the data becomes so skewed due to a “black swan” event such as a global pandemic that these forecasting models break down?

If you’re the Federal Reserve setting monetary policy, what happens is a lot of guesswork and regular updates to the paths of everything from GDP growth and inflation to setting interest rates and how much to support the banking and mortgage markets.

Pandemics Speed Up Economic, Cultural Changes

During past pandemics, there were rapid advances in public health, patient care, quality of housing and even art. Although cities decimated by past pandemics, including the 14th century’s Black Death, usually prospered in time, today the widespread availability of instant communications makes cities much less important to conduct day-to-day business for up to 45% of the country’s workforce. That will impact land use.

In addition, the pandemic break gave many Americans a glimpse of what life could be like without the stresses of juggling demanding careers and supporting families around lengthy commutes. Despite the enormous pain and suffering brought by COVID-19, historians may look back at this time as an important inflection point when much of the U.S. workforce insisted on keeping a substantial share of the work-life balance they enjoyed during the pandemic. That will also impact land use.

Mortgage Rate Forecast

Given the rapid rise in mortgage rates and the related decline in affordability during 2022, it stands to reason that home values would need to adjust accordingly. Since its last peak in June 2022, the national S&P CoreLogic Case Shiller Index fell by 3% through October, and median home prices are predicted to fall 5.3% in 2023 as long as mortgage rates remain relatively high.

If history is any guide, home values tend to remain sticky even when demand falls, as buyers don’t want to overpay and sellers prefer to hold on until values rebound, which limits home sales. When home values on the Case Shiller Index first began to fall year-over-year in early 2007, a year later they had fallen by less than 8%. It was during the following 12 months that values fell by nearly 13%.

This larger decline was due to homeowners facing a deepening recession as well as payments for many “option ARM” adjustable-rate mortgages resetting higher, forcing them to sell into a declining market, deed the home back to the lender or risk foreclosure proceedings. Fortunately, there are no signs of these types of national declines in home values for three reasons: low inventory, higher-quality mortgages with no option ARMs, and little chance of the same type of severe recession resulting from the financial crisis.

Still, while mortgage rates are falling now as inflation subsides, mortgage bond holders are well aware of several economic wildcards in the year ahead that could limit rates falling significantly due to the additional uncertainty. Whether it’s another potential surge of COVID-19 cases due to the low uptake of vaccine boosters, the extent to which China’s reopening will impact energy markets and inflation or the path and duration of the Russia-Ukraine war, mortgage investors may prefer to retain some extra wiggle room to compensate them for added risks.

Home Price Predictions

While it’s quite possible for median home prices to fall another 5% in 2024 – or a total potential drop of about 10% from the end of 2022 – if mortgage rates decline faster than predicted, that could mean home prices remain mostly flat through the end of 2024. However, if real incomes rise faster than inflation, the combination of that extra purchasing power plus lower mortgage rates would boost affordability, home sales and prices.

If that happens from 2025 through 2027, look for home prices to start rising again by approximately 1% to 2% above the current inflation rate. But it will likely take some time to reach the home value heights of mid-2022.

Housing Market Has Yet to React to ‘Hollowing Out’ of Big Cities

Once the flexibility known as work from home was widely offered in early 2020, a large share of the American workforce was able to discover the advantages of avoiding a daily commute. As it turns out, many of them were not interested in returning to the pre-pandemic status quo.

Teachers, who might have otherwise resisted learning new digital technologies such as Zoom, had no choice as public school campuses closed in 2020, but now most are well-prepared to teach students online if the need arises.

Still, despite the conveniences of working or learning from home, there are some key trade-offs, especially when it comes to mental health. The rates of depression and anxiety soared throughout the pandemic as regular interactions with friends and colleagues collapsed, and younger students missed out on crucial years of gaining social development skills with peers.

For now, while students have mostly returned to the classroom, employers are continuing to experiment with a mix of WFH and full-time return to office. According to the Employee Back to Work Barometer for the country’s 10 largest cities by Kastle Systems, which digitally tracks employees entering offices and businesses, just under half of these spaces were occupied in the final month of 2022. While clearly a vast improvement from the 15% rate estimated in mid-March 2020, it’s still half of pre-pandemic levels.

What this means for the residential and commercial real estate markets remain to be seen, but according to research published by Stanford University economics professor Nicholas Bloom and economist Arjun Ramani, during the pandemic a land use “doughnut effect” emerged in the country’s largest cities.

This doughnut effect describes a hollowing-out of traditional economic activity in downtown cores of large cities (or the center), which has migrated to the outlying suburbs (the doughnut itself) – perhaps permanently. How cities like San Francisco and New York react to this trend, such as helping to bring down the price of housing with more affordable supply or even encouraging the conversion of office space to housing, will determine the permanence of these big-city doughnut holes.

Expect Fewer Single-Family Homes in Core Urban Real Estate Markets

For many years, land planners and homebuilders have used various ways to build new, single-family homes on smaller lots, which provide some measure of privacy while also allowing for a reasonable profit. However, in existing, built-out communities with the highest housing costs and rising cases of homelessness, cities such as Minneapolis and states including California and Oregon have altered zoning laws to allow developers and homeowners to build more housing units on single-family lots.

For those housing analysts who say outdated zoning ordinances are a primary reason for local housing shortages, accessory dwelling units built next to existing homes and smaller, multifamily buildings replacing single-family homes will become more common in the densest urban cores over the next five years.

Under the “highest and best use” calculations frequently used by real estate appraisers, once the zoning laws are changed, that best use based on demand may no longer be the traditional single-family home with a picket fence and its own yard. Instead, it will likely be home to the estimated 55% of essential workers who have no choice but to work on site in hospitals, retail stores and food establishments.

More Single-Family Homes Will Be Built as Part of HOAs

When potential homebuyers consider an attached home condominium or townhome, they usually know that means becoming a member of a homeowners association. However, in recent decades the share of new single-family homes that are part of HOAs has also steadily crept up. For 2021, Census Bureau data shows that 78% of new single-family homes built for sale nationally were part of an HOA, up from 64% just a decade earlier.

There’s a practical reason for this: From the perspective of a fast-growing city or town, outsourcing the development of new community infrastructure such as sewers, roads and parks to a private company eventually funded with HOA fees and special taxes by new residents allows it to meet the demand for housing without destabilizing municipal finances.

While this trend may place an additional pricing premium on existing single-family homes without an HOA, most residents surveyed by the Community Associations Institute report acceptable experiences with theirs. For those new residents not happy with a rule or expense imposed by an HOA, there’s a well-traveled path to have a seat at the board of directors table: Run for an office. Not only can this experience provide a useful education on community finances, but it can reveal HOA red flags for future purchases.

Other Trends to Watch

With so many real estate and land use trends to watch throughout the 2020s, here are some other issues we plan to cover in more detail in the months ahead:

Costs and Consequences of Climate Change Will Rise in Importance

Rising seas, stronger storms, larger wildfires, stubborn droughts and pests including termites migrating northward will lead to both increased insurance and building costs resulting from climate change over the next five years.

Total Cost of Ownership Will Become a Key Metric

Purchase prices, mortgage rates, property taxes, HOA fees, maintenance costs, adapting to a changing climate and insurance premiums will become a more popular barometer of total costs than just principal and interest payments alone.

More Buyers Will Join With Friends and Family Members to Purchase Homes

Intergenerational households, grown children “boomeranging” home and families created from friendships will increasingly pool multiple income sources to purchase homes and avoid the uncertainty of housing costs as renters.

The National Housing Shortage Will Last Through the End of the 2020s

With the estimated pent-up demand for housing ranging from 1.5 million to nearly 3.8 million homes, it will take some time for the nation’s builders to find suitable land, skilled labor and materials to create much-needed supply. The National Association of Home Builders expects this pent-up demand to be supplied between 2025 and 2030. However, unless there’s a consistently higher rate of legal immigration above recent years, changing demographics by 2030 will result in lower demand for new housing.

There Will be Changes in the Ways Homes are Built

Although still in their infancy, production methods such as 3D printing, using more factory-built structural components and leveraging software to minimize the waste of materials are expected to improve building quality while also speeding up construction timelines.

Five-Year National Housing Market Predictions for 2023-2027

Following is a year-end forecast for 2022 and some five-year predictions for the housing market, between 2023 and the end of 2027. These predictions assume a relatively shallow recession that stops and starts in 2023 and inflation that is under control by 2024, allowing mortgage rates to decline, which will boost home affordability.

However, there are two important caveats to keep in mind with these market predictions:

5-Year Housing Market Forecast 2022-2027

^{Sources: NAR, Redfin, U.S. Census Bureau, Zillow, Yardi Matrix, FreddieMac}

Home Prices Will Not Regain Their Mid-2022 Values Until 2027

After falling in 2023 and 2024, home prices are predicted to plateau in 2025 before rising again at just above the rate of inflation. However, due to the spike in home values from 2020 through 2022 due to record-low mortgage rates, median sales prices will take at least until 2027 to regain the highs of mid-2022.

Home Sales Will Fall in 2023, Plateau, Then Gradually Rebound Through 2027

After falling sharply in 2023, existing home sales are predicted to gradually rise and finish 2027 nearly 18% above 2022 levels. Similarly, new home sales contracts will fall in 2023 as builders wait for demand to resume, and will also gradually rise and finish 2027 20% higher than sales in 2022.

Home Rents Will Continue to Rise, But at Lower Levels

After rising sharply in 2021 and into 2022, home rents are predicted to continue rising, but at a lower level more in line with longer-term historical trends. By the end of 2027, median rents are predicted to rise by about 25% from the end of 2022, increasing faster for more popular single-family homes (27.6%) versus multifamily apartments, condominiums and townhomes (21.6%).

Housing Starts Will Decline Sharply in 2023, Start to Rebound in 2024

After declining sharply in 2023, housing starts for single-family homes are predicted to gradually rebound in 2024 and finish 2027 up 5% from 2022 levels. Starts for multifamily homes, which soared in 2022, are predicted to gradually return to historical levels and finish 2027 down about 9% starts from 2022.

Building Permits Will Decline in 2023, Plateau in 2024 and Begin Rising in 2025

Following sharp declines in 2023, single-family building permits are predicted to plateau in 2024 and begin rising again in 2025, but by 2027 they will still be down 16% from 2022 levels. Permits for multifamily homes, which rose sharply during the pandemic as builders raced to provide more supply, are predicted to continue declining through 2025 before rebounding gradually through 2027 but will still be down nearly 26% from 2022 levels.