Where Are Real Estate Prices Going Next?

October 14th, 2023

balance seesaw

Most everyone knows low inventory is keeping real estate prices high. But why is inventory low? Because 90% of US homeowners have a 6% or lower mortgage rate. 62% have a rate below 4%! No one wants to give up their great rate for a much higher rate. They won’t move! But how does this end? When does it end? It can’t stay this way forever. Eventually people must move. People will move due to retirement. Or families will need larger homes. Or sometimes they are ready to downsize.

My theory is inventory will increase over a long period of time, and that may bring prices drops. But when? Interest rates going up has not stopped housing demand nor price increases. Rates going down won’t cause real estate prices to spike. And rates going up even more than they are now won’t cause prices to tumble. Historically low inventory will see to that.

However, in the next 5-15 years as people have to move, then inventory will increase. And then prices may fall. It will take 5-15 years for inventory to move higher because that’s when people will age out of their current housing needs. There are people living in 3-4 bedroom homes that are 2,000-4,000 square feet who have raised a family. They’ll become ready to retire or downsize, and will start selling. Then other homeowners will see inventory increasing and perhaps falling prices. And they’ll decide to sell too before prices fall more. Then things may escalate as far as price reductions and increasing inventory.

Because of all this potential homebuyers are now frequently asking if they should wait to buy a home. The implication is that people are worried that housing values are going to fall. So why buy now? Isn’t it smarter to wait? Maybe, maybe not. You may have to wait a very long time. But it is clear why everybody questions the future of real estate values.

Real estate prices are not solely based on inventory and mortgage rates. Other things come into play like population growth, wage growth, and jobs. And the economy and population shift is important. People seem to be moving to warmer climates and lower tax areas. All of that will also have an impact on real estate prices. To assume that higher interest rates alone will sink real estate prices has been proven to be false.

If prices don’t drop for 5-15 years, should you buy now and enjoy appreciation, and then suffer some loss later? If prices go up 30% over 7 years, and then fall 10-15%, aren’t you still ahead of the game? What if prices go up 30% and then go down 30% years later? Then you broke even, but still owned a home. You possibly enjoyed tax breaks. And did not live in a rental property where they could raise rents or kick you out to sell it.

Real estate markets are very local.

We also can’t assume that real estate is going to fall across the board in every community. If housing values start to correct in general some markets may decline a great deal. And some may decline a small amount. Others may simply stall out with no losses nor price increases. That makes it hard to say what you should do in your local market. You have to be well-informed in your market on its real estate, jobs, population shift, and more.

Timing the market

Trying to time the real estate market is difficult to impossible. Let’s discuss what happens if you decide to wait. If you wait two years to buy, what do you lose in rent paid to a landlord? What do you lose in appreciation if housing values don’t go down? If real estate values do drop, will the drop in value exceed what would have been your rent cost?

And as you are renting for the next couple of years will your rent costs increase? Will interest rates rise causing your eventual house purchase to be more expensive than now? There are a lot of variables to consider.

What if housing values only drop slightly?

Or what if the market just stays flat and it doesn’t drop at all? Or maybe real estate values only drop slightly? Then you will have waited for no good reason.

One would need the perfect storm of circumstances to have waiting to buy a home to deliver a big payoff.

  • If interest-rates stayed the same or dropped over the time you were renting…
  • If housing values dropped significantly…
  • If your rent did not increase…
  • If your rent cost was moderate to begin with…

Then waiting to buy a home might make sense. However, that is a lot of “ifs” to happen all at the same time.

Why wait?

If you need a house, then buy a house. Make it one you love, and “buy and hold”. If you buy a house that you love, it should be one that you could live in for a long time if needed. Or maybe you’ll plan to stay there forever by design? Owning a home for a long time helps to make short term market fluctuations much less important.

This study by the Federal Reserve Bank of Dallas shows international housing data from 1870-2012! It is 132 pages, so I’ll spare you the long read. It says that house prices in most industrial economies stayed constant in real terms from the 19th to the mid-20th century. And then rose sharply late in the 20th century and into the 21st century.

This blog has a chart that shows home prices from 1953-2021.

It shows land prices, not construction costs, have influenced the trajectory of house prices in the long-run. Residential land prices have surged in the second half of the 20th century. Increased regulations on land use further inhibited the utilization of additional land. And there has been increased demand for housing.

A few interesting charts by the St. Louis Federal Reserve show average real estate prices and median real estate prices from 1965 to 2020. They show real estate took off in the second half of the 20th century and into the early 21st century. But will it continue?

My opinion

Land restrictions and population growth have combined to cause real estate value to grow over the last 6-7 decades. To me, real estate values are about jobs, job growth, wage growth and population growth. What do I do to ensure that I am buying a home that will grow its value as much as possible? I look to buy in a market where people are moving, and jobs are strong.

That does not mean that I wouldn’t buy a home in a slow job growth market, or a market where population is leaving. But I would heavily consider my offer price and adjust accordingly.

Historical interest rates

We also must remember that rates have only been as low as 3.00% or 4.00% a few times in history. 6.00% or 7.00% mortgage rates are average in the history of our country. You can see more data on historical mortgage rates here: 220 Year History of Interest Rates.

Waiting for rates to drop to the historical lows we saw a few years ago is folly. The charts show that may not happen again for another 50-70 years.

Conclusion

As you can see there are a lot of considerations when buying real estate. When market momentum has shifted you should question if it’s going from a sellers’ market to a buyers’ market. But in many instances real estate prices are sticky. They won’t go down fast enough to offset a lot of the issues I’ve mentioned above.

Contact me to discuss your local housing market, mortgage rates, or other mortgage questions. Click here to schedule a call or you can email me directly.

Categories for this post:
Tags for this post: See all Tags

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

Leave a Reply