Introduction
The US housing market has experienced a significant surge in single-family home prices over the last several years. Despite some early signs of cooling, experts predict home prices will continue rising soon. Due to high demand and limited supply, single-family home prices have skyrocketed by 43% in the past four years, with an additional 7.6% increase seen just since January 2024.
For existing homeowners, this trend has been a windfall, as rising home values have led to substantial increases in equity. On average, homeowners in the US saw a 9.6% boost in equity last year alone, adding a collective $1.5 trillion in wealth. Many have taken advantage of this by tapping into their home equity, as reflected in the growing number of online searches for terms like “home equity.”
However, while current homeowners benefit, the high prices leave first-time buyers struggling to enter the market. Homeownership is becoming an increasingly distant dream for many as they face steep competition and rapidly rising costs.
Existing Homeowners Reap the Rewards
The upside of this market boom has been most evident for homeowners, who have seen their property values—and personal wealth—soar. As market values rise, so does home equity, allowing owners to borrow against the increased value or enjoy the appreciation of their investments.
For many, this increase in equity has provided a financial safety net, enabling home improvements, debt consolidation, or even funding other investments. In fact, with home equity increasing by nearly 10% over the past year, homeowners are in a stronger financial position than ever before.
The trend has encouraged many to keep their properties longer as they benefit from ongoing value appreciation. As Lawrence Yun, the National Association of Realtors chief economist, explains, “A crash happens with oversupply. It will not happen because there isn’t enough inventory.” With low inventory and strong demand, the housing market will unlikely face a significant downturn anytime soon.
First-Time Buyers Locked Out
While existing homeowners are reaping the rewards, prospective buyers—particularly first-time buyers—find it more challenging to break into the market. Rapidly rising prices have made affordability a key challenge. The median home price in the US has climbed to levels many potential buyers can’t afford, especially in light of higher mortgage rates compared to the historically low rates seen in recent years.
The barrier to entry is even higher for younger buyers and those without significant savings, as they face fierce competition from cash buyers, investors, and those with larger down payments. This trend has further widened the gap between homeowners and renters as more people are priced out of buying a home altogether.
Cooling Signs, But Long-Term Home Prices Will Likely Climb
While the overall trend points to rising home prices, there are some early indications that the market could start to cool. Median home prices dipped slightly in the first quarter of 2024. Additionally, as more homeowners locked in low mortgage rates reach the end of their terms, an increase in housing inventory could help alleviate some of the upward pressure on prices.
However, experts like Yun caution that these cooling signs are temporary. He predicts home prices will rise by 15% to 25% over the next five years, fueled by the persistent gap between high demand and limited housing supply. The ongoing housing shortage and strong buyer interest suggest that the long-term outlook for home prices is still upward.
The Future of US Home Prices
In the medium term, US home prices are expected to continue climbing, albeit at a potentially slower pace. While there may be short-term fluctuations as the market adjusts to changing interest rates and economic conditions, the fundamental supply-and-demand imbalance is unlikely to resolve anytime soon.
For current homeowners, this offers a continued opportunity to build wealth through home equity, while first-time buyers may need to explore creative solutions or wait for more favorable conditions to enter the housing market.
In summary, although signs of a cooling market are emerging, the long-term trend points to rising home prices, making it more critical than ever for buyers and homeowners alike to navigate this competitive environment wisely.
