Housing Costs Could Return to “Normal” Within 5 Years
If mortgage rates drop to 6% and home-price growth returns to around 2.1%, housing costs could hypothetically return to “normal” within five years, according to a new Redfin report.
Alternatively, Redfin said housing costs could return to normal within six years if mortgage rates stay where they are today, about 7.5%, and home-price growth flattens.
Redfin noted that if mortgage rates drop to the lowest bounds of Redfin’s expectations, 6%, and price growth were to flatten, housing costs could return to normal by February 2029. That’s possible but unlikely, Redfin said.
There is a flip side.
It could take 10 years or more for costs to return to normal if mortgage rates remain persistently high, between 7% and 8%, and prices keep growing at their current annual rate of 2.1%. Redfin says that’s also unlikely but possible.
If rates stay that high, home-price growth would be difficult to sustain without a further decline in home sales, the brokerage noted.
How Redfin Defines ‘Normal’
Redfin said its analysis explores hypothetical scenarios for U.S. home-price growth, mortgage rates and income levels, and uses those scenarios to estimate when housing costs could return to “normal.” For the report, “normal” means housing costs, defined as the mortgage-payment-to-income ratio, have returned to August 2018 levels.
At that time, Redfin said, the national median monthly mortgage payment-to-income ratio was 30%, meaning the typical U.S. homebuyer would need to spend 30% of their household income on their monthly mortgage payment. The 30% threshold is a widely recognized benchmark for housing affordability.
At the metro level, “normal” does not necessarily mean “affordable,” Redfin said.
Rather, “normal” means the metro has returned to its 2018 level of home prices relative to incomes, even if the median home in some expensive metros remains out of reach for the typical household.
Redfin’s analysis is theoretical, and the hypothetical scenarios should not be read as predictions, the brokerage said. But Redfin noted they represent real trends in home-price growth, mortgage rates and income growth, and that any of them are possible.
“Many house hunters feel stuck between two bad options: Stretch themselves to buy at today’s rates, or wait for lower rates only to see prices climb further out of reach,” said Redfin Senior Economist Asad Khan. “But prospective buyers shouldn’t get hung up on timing the market. These hypothetical scenarios should give would-be buyers and sellers some hope that the market can normalize with only modest changes in rates or prices. For buyers and sellers, that means the best time to make a move is when it makes sense for your finances and your life. If you’re a buyer who needs more time to save for a down payment, take more time. If you’re a buyer who has the means to buy at current costs and you find your dream home, don’t let today’s rates stop you.”
In Parts of West Coast, Costs Are Almost Back to ‘Normal’
The timeline for return to normalcy varies by region, Redfin said.
According to Redfin, housing costs are closest to returning to normal in San Jose, California, where declining home prices (-3.2% year over year), combined with the fact that Redfin expects strong future wage growth (6.5%), mean housing costs could return to normal in just over one year—even with today’s 7.5% mortgage rates.
Should rates fall to 6.5%, San Jose’s housing costs could return to normal by the end of this year. That’s largely due to stronger-than-average income growth, thanks to the Bay Area’s tech-fueled economy, Redfin noted.
After San Jose, Austin, Texas, is the closest to returning to normal housing costs.
Redfin said that with 7.5% mortgage rates, costs could return to normal by early 2028 in Austin. That’s because home prices are down 2.9% year over year there, while Redfin projects wages to post annual growth of 4.9%. Prices have fallen in Austin because of slow homebuying demand combined with lots of supply, largely due to pandemic-era overbuilding, the brokerage said.
Next is Oakland, California, where housing costs could return to normal by spring 2028 with 7.5% rates, Redfin said.
Redfin noted that in roughly half of the metros the brokerage analyzed, it could take at least a decade for housing costs to normalize. Many are in the Northeast or Midwest, including Boston, the New York City area, Chicago and Milwaukee—and many are places where home prices are growing faster than the national average.
The brokerage said that price growth is strong in most of those places because they’re generally more competitive markets than the West Coast or the Sun Belt. Nassau County is the nation’s strongest seller’s market, and Chicago is hotter than most other U.S. metros.
