Homebuyers, homeowners, and home sellers have likely heard that real estate tends to appreciate over time. The next logical question they often wonder is this: How much will their property be worth in the future?
Let’s be frank: Predicting the future value of a home is a challenging task due to the multitude of factors involved, including economic conditions, local market dynamics, and potential downside risks. So instead of trying to make an exact prediction about what home prices might look like in 12 months or 24 months, let’s examine the historical returns and see if they could give us any clues about the long-term potential.
To do our analysis, Realtor.com® pulled historical data from Freddie Mac to calculate the average home price returns since 1975.
Since 1975, the average five-year return on U.S. home prices has been +26%.
Given Realtor.com data shows that the median list price in May comes in at $442,500, in theory, this same listing could appreciate to about $557,550 in five years.
But this will vary a lot by area:The highest average five-year returns have been observed in Massachusetts (+36%), Rhode Island (+34%), and California (+34%).
The lowest average five-year returns have been seen in Oklahoma (+14%), West Virginia (+15%), and Louisiana (+15%).
Since 1975, the average 10-year return on U.S. home prices has been +57%.
Taking the same May median home price of$442,500, this means that in 10 years, a house could appreciate to $694,725.
The highest average 10-year returns have been observed in Massachusetts (+87%), California (+78%), and Washington (+74%).
The lowest average 10-year returns have been seen in West Virginia (+31%), Mississippi (33%), and Oklahoma (+34%).
Why home price appreciation depends on where—and when—you buy
The Realtor.com analysis suggests that home prices tend to tick upward over time. However, in the short term, regional home prices can certainly fall—just look at Austin, TX, where the median price per square foot has fallen by about 9% since the COVID-19 pandemic.
"Over the last 22 years, home sale prices have increased on average 4.2% annually at the national level," says Realtor.com senior economic analyst Hannah Jones. "However, price growth has ranged from -14% to +16% in any single year over that time period."
Given these variations, this might be why there's the "five-year rule of thumb" in real estate—which suggests that most buyers can buffer themselves from mild short-term declines if they plan to own a property for at least that amount of time. While it's not a strict rule or guarantee, properties typically appreciate in value over five years. This also allows homeowners to build equity and recoup the one-time transaction costs.
"Generally, the longer you stay put, the smoother and more predictable the price appreciation trend will become," says Jones.
"But it greatly depends on when and where you buy. For example, buyers in 2006 saw sale prices fall the following three years, then start to climb again, reaching 2006 price levels once again more than a decade later, in 2017. However, buyers in 2012 saw prices climb for a decade, giving them the freedom to sell whenever was right for their circ*mstances."
Where home prices could head next
Where do the experts think national home prices could go over the next few years?
Goldman Sachs believes that national home price growth will remain around its historical average. The average one-year return since 1975 is +4.7%.
However, Moody's expects a period of sideways movement.
The primary reason for the uncertainty?
The recent pandemic housing boom and mortgage rate shock have stretched affordability relative to income. Moody's and similar groups suggest that this affordability pressure could constrain short-term home price growth. Meanwhile, analysts at Goldman Sachs believe that the lack of supply will outweigh affordability concerns, pushing national home prices slightly higher over the next few years.
"Trying to time the market is tricky. The best way to be set up for success is to buy a home that you can afford and can imagine living in for the foreseeable future. When it comes time to sell, you can weigh market conditions against the flexibility of your circ*mstances and choose when to list given your constraints," says Jones.
