Homebuyers, homeowners, and sellers generally understand that real estate tends to appreciate over time. For them, a logical question is: how much will their property be worth in the future?
Frankly, predicting the future value of a home is a complex and challenging task. Many factors influence home prices, including economic conditions, local market dynamics, and potential downside risks. Therefore, rather than attempting to accurately forecast home prices for the next 12 or 24 months, it is better to look for clues about long-term potential from historical data.
To provide a more accurate analysis, Realtor.com® used historical data from Freddie Mac to calculate the average home price return rate since 1975. Since then, the average five-year return rate for U.S. home prices has been 26%. According to Realtor.com, the median listing price in May 2024 was $442,500. Theoretically, such a home price could appreciate to around $557,550 over five years.
However, the rate of increase in home prices varies significantly across regions. For example, the five-year average return rates in Massachusetts, Rhode Island, and California are 36%, 34%, and 34%, respectively, among the highest in the nation. In contrast, Oklahoma, West Virginia, and Louisiana have lower five-year average return rates of 14%, 15%, and 15%.
Regarding ten-year return rates, the ten-year average return rate for U.S. home prices since 1975 has been 57%. Based on the May 2024 median home price of $442,500, this means that a home could appreciate to $694,725 in ten years. The states with the highest ten-year average return rates include Massachusetts (87%), California (78%), and Washington (74%). Conversely, West Virginia (31%), Mississippi (33%), and Oklahoma (34%) have lower ten-year average return rates.
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Realtor.com's analysis shows that although home prices have an upward trend in the long term, regional home prices may fluctuate in the short term. For example, since the COVID-19 pandemic, the median price per square foot in Austin, Texas, has dropped by about 9%. "Over the past 22 years, national home sale prices have increased by an average of 4.2% annually, but during this period, annual price changes have ranged from -14% to +16%," said Hannah Jones, Senior Economic Analyst at Realtor.com.
These price fluctuations might explain why the real estate industry generally adopts the "five-year rule." This rule suggests that if buyers plan to hold the property for at least five years, they will be better able to withstand minor short-term price declines. Although not a hard and fast rule, real estate typically appreciates over five years, allowing homeowners to build equity and recover one-time transaction costs.
"In general, the longer you hold onto a property, the more stable and predictable the price increase trend will be," said Jones. However, the timing and location of the purchase significantly influence price trends. For example, buyers who purchased properties in 2006 experienced price declines in the following three years, and it took until 2017 for prices to return to 2006 levels. In contrast, buyers in 2012 saw ten consecutive years of price increases, giving them more flexibility when selling.
Looking ahead, experts have differing views on national home price trends. Goldman Sachs believes that national home price increases will remain near the historical average, with an average annual return rate of 4.7% since 1975. On the other hand, Moody’s expects the market to experience a period of flat performance.
One of the main uncertainties affecting future home prices is the recent pandemic-driven real estate boom and mortgage rate fluctuations, which have made home prices more affordable relative to income. Moody’s and similar institutions believe this affordability pressure may limit short-term home price increases. However, Goldman Sachs analysts think supply shortages will outweigh affordability concerns, driving slight national home price increases over the next few years.
"Timing the market is very difficult," experts suggest. "The best way to prepare for success is to buy a home you can afford and envision living in for the next few years. When you need to sell, you can choose the best time to list based on market conditions and your situation."
