People who have been hoping for the housing market to cool off are noticing some slight improvements recently, but a new report indicates it might take longer than expected for things to stabilize.
In late August, the average mortgage rate for a 30-year loan dipped to 6.56%, which is the lowest it’s been in ten months. However, this is still higher than the 6.35% average from a year ago. Home sales are also slowing, with sellers even pulling listings off the market. Treasury Secretary Scott Bescent has mentioned that the Trump administration might declare a national housing crisis this fall to help ease costs for buyers.
So, what does this mean for the outlook of the US housing market? Experts suggest there’s no straightforward answer, but a variety of factors could indicate how far we are from what many consider a “normal” market.
What does a “normal” housing market look like?
Redfin recently analyzed these factors in comparison to 2018, which it defined as a baseline year for the housing market. Back then, mortgage rates were manageable, and typical households spent about 30% of their monthly income on mortgage payments, a figure that aligned with standard budgeting advice.
Today, with mortgage rates around 6% and home prices still relatively high, the median household spends approximately 38.4% of its income on mortgage payments, according to Redfin.
In compiling the report, Redfin used economic forecasts that suggest mortgage rates could drop to 5.5% by the end of the decade, while household income is projected to rise by about 4% annually.
If home prices decrease, they could potentially increase at a rate of 1.4% per year. However, the report hints that a return to a “normal” market might not happen until November 2030, particularly if mortgage rates remain high at around 6.7%.
On the other hand, if home prices decline by 2% annually and mortgage rates drop to 5.5%, achieving “normal” levels might be possible by November 2027.
If home prices stay stable but the mortgage rate falls to 5.5%, a normal market could be seen by January 2029. Conversely, if rates remain around 6.7%, that timeline could shift to September 2031.
However, it’s important to note that housing markets can differ significantly across the country.
Some regions nearing “normal”
According to Redfin’s findings, San Francisco has already reached normal levels, and other cities might be on the verge as well.
Still, the report emphasizes that normal housing costs do not equate to affordable housing costs. For instance, households in San Francisco are still spending about 67% of their monthly income on median home prices compared to 2018. Nearby Oakland could also be considered in a normal range if mortgage rates drop to 5.5%.
Outside of the 50 major metros surveyed by Redfin, 16 cities could potentially reach normal housing costs within the next five years if rates decline. That said, only 11 cities may achieve this under less favorable conditions.
In an optimistic scenario, Austin, Texas, might see a return to normalcy by December. Meanwhile, San Jose, California, might reach that goal by February 2026, and both Denver and Sacramento could follow suit by October 2026. Austin is projected to return to normal by March 2027.
Redfin also examined what housing costs for 50 cities could look like if prices stabilized and rates dropped to 5.5%. Under those conditions, only New Brunswick and Newark in New Jersey would not return to normal.
In general, cities in the Midwest, New England, and the Northeast will likely need mortgage rates to drop before they can expect to see normalcy, a process that could take more than a decade.
Mark Khan, a senior economist, noted that price increases in Midwest and East Coast markets this year make returning to normal costs less likely, particularly if those trends continue. Interestingly, the West Coast has also seen significant price growth in previous years, but those markets are starting to normalize. It’s clear the housing market is fluid, and trends could shift drastically by 2030.
Current state of the market
Recent analysis by Zillow has categorized the Midwest and Northeast as seller’s markets this year, while the Bay Area and Southern California have remained steady. In contrast, southern cities, especially in Florida, have become buyer’s markets.
Yet, the Midwest and Ohio Valley areas remain the most affordable for median-income residents, according to another Zillow report.
However, it appears that mortgage rates are unlikely to change much this year, with economists expecting the average 30-year mortgage to stay in the 6% range in the medium term.
In a recent address, Federal Reserve Chairman Jerome Powell indicated that the central bank may soon consider cutting rates, although inflation might be a concern.
While the Fed does not directly set mortgage rates, rate cuts could influence the job market and the overall economy, yet they might also lead to inflationary pressures that could push mortgage rates higher.
Lisa Sturtevant, chief economist at Bright MLS, said that while the Fed is likely to cut rates in September, it’s uncertain whether mortgage rates will follow suit. Thus, both buyers and sellers remain cautious, leading to continued market fluctuations in the coming fall.
