Housing market gets positive forecast for 2030

After years of skyrocketing home prices and stubbornly high mortgage rates, the U.S. housing market is finally “on the patch back to normal,” according to a selection of real estate experts.

In a new report, Redfin said that “the light end of the tunnel” is in sight for millions of Americans, and normal housing costs could return to the U.S. as soon as 2030.

“Normal,” however, does not necessarily always mean affordable.

How Did This Hellish Housing Scenario Start?

Home prices have surged all across the country as demand exploded between 2020 and 2022, when low mortgage rates, the rise of remote work, and a renewed focus on the domestic space triggered by the pandemic caused a nationwide homebuying frenzy.

Despite the cooling effect played by suddenly much higher mortgage rates as a result of the Federal Reserve’s aggressive rate-hiking campaign between 2022 and 2023, home prices have continued climbing because of the chronic lack of inventory across the country.

While recent supply headwinds are putting downward pressure on prices, especially in markets where inventory has grown the most in recent months, home prices are still around 40 percent higher than they were before the pandemic.

As of the week ending on August 28, the 30-year fixed-rate mortgage—the most popular home loan among Americans—was 6.56 percent, a 10-month low, according to Freddie Mac.

Realistically, mortgage rates are still much higher than the lows of 2-3 percent recorded during the pandemic. But even a small dip is a positive signal suggesting that mortgage rates are starting to fall and will likely continue doing so if, as expected, the Federal Reserve cuts rates this month.

What Does ‘Normal’ Mean For The U.S. Housing Market?

For the sake of its study, Redfin considered “normal” to be the way the U.S. housing market was in 2018, before the pandemic chaos. In July 2018, mortgage rates were in the mid-4 percent range, and while home prices were rising, this growth was not outpacing wages the way it has over the past five years.

The national median monthly mortgage payment-to-income ratio was around 30 percent, which meant that the typical U.S. household buying a home needed to spend 30 percent of their income on their mortgage each month.

This is around the amount that economists consider affordable for a household. As of this year, the typical U.S. household spends 38.4 percent of their income on their mortgage monthly payments.

Possibly because homes were relatively affordable, supply and demand was relatively balanced in 2018—unlike now, with sellers outnumbering buyers by over 500,000.

While for many parts of the country a return to normal would make homebuying more affordable, in other areas, prices would remain extremely high. San Francisco, for example, has already returned to normal according to Redfin—the only market to have done so, so far.

But San Francisco’s “normal” could have never objectively been called affordable. Already in July 2018, before the home prices rollercoaster of the pandemic, the monthly mortgage payment-to-income ratio was 74 percent in San Francisco—far above the national level.

What Does The End Of The Current Crisis Look Like?

For Redfin, the end of the current housing affordability crisis will not necessarily happen with a bang—or, more specifically, a crash—but with a gentle realigning of the conditions that for years have been out of whack.

That includes the need for home price growth, which has been rampant for years, to finally stabilize and for mortgage rates to come down below the 6 percent mark.

Assuming that annual household incomes in the U.S. continue growing at 3.9 percent and mortgage rates fall to 5.5 percent, the housing market will return to normal by:

• November 2030, if home prices keep growing at the current rates (+1.4 percent year-over-year);
• January 2029, if home prices stay flat;
• November 2027, if home prices fall by 2 percent year-over-year;
• July 2032, if home prices grow by 2 percent year-over-year.

Should mortgage rates stay at the current level—about 6.7 percent—the housing market will only return to normal by:

• December 2034, if home prices keep growing at the current rates (+1.4 percent year-over-year);
• September 2031, if home prices stay flat;
• August 2029, if home prices fall by 2 percent year-over-year.

If home prices grow by 2 percent year-over-year, the housing market will not return to normal for the next ten years, according to Redfin estimates.

“The path back to normal housing costs doesn’t require a crash in home prices—stability may be enough,” Redfin senior economist Asad Khan said in a press release shared with Newsweek.

“Buyers shouldn’t expect affordability to snap back overnight, but the trend lines point to real progress within this decade. If mortgage rates decline modestly, and price and income growth hold steady, the market for homebuyers could feel much different by the late 2020s. We are cautiously optimistic normalcy may not be as far off as many might fear.”

A Split Housing Market

The U.S. housing market is already split regionally, with the South seeing a deep correction while in parts of the Northeast and the Midwest home prices are still growing.

This phenomenon will continue within the process of normalization highlighted by Redfin, with some markets reaching their 2018 normalcy much faster than others which are unlikely to reach that level within the next ten years, even with much lower mortgage rates.

“Tech-driven metros like those in the Bay Area, along with Austin, Seattle and Denver are seeing wages grow considerably faster than the national rate of 3.9 percent,” Khan said. “At the same time, home price growth in these metros has cooled considerably from pandemic peaks. We have already seen housing costs return to 2018 levels in San Francisco because wages have kept growing at a high rate at the same time that home price growth stabilized.”

In the Midwest and the East Coast markets, where demand has been strong and inventory short, housing costs are less likely to return to normal anytime soon.

“This year we’ve seen faster price growth in Midwest and East Coast markets, which makes them less likely to return to normal housing costs soon if we assume those growth rates will continue,” Khan said.

“Back in 2018, however, it was the West Coast leading price growth and now those markets are generally on a clearer path back to normalcy. The housing market is constantly evolving, and today’s trends may look very different by 2030.”