Zillow Predicts a 4.9% Rise in Home Prices by Next August—Is That Possible?

If you thought real estate prices were high enough, buckle up because some analysts think prices will keep rising. Real estate tech marketplace Zillow predicts home prices will keep going up through next year, largely due to the increase in homes for sale.

In a recent report, Zillow researchers said they think prices will rise 4.9% from August 2023 through August 2024. While that’s good news for current owners, buyers are already feeling the pinch. If prices keep going up, will they be able to keep up? 

What the Data Says 

Although Zillow lowered its initial predictions from August, when it said prices would jump 6.5% from July 2023 to July 2024, the real estate marketplace is still optimistic about the market. While Zillow revised its projections downward to 4.9% as it anticipates higher mortgage rates and a decrease in market tightness, an uptick in for-sale listings has it confident that prices will continue to rise into next year.

New listings in August rose 4% from July’s numbers, the first time in Zillow’s history that listings increased over the normally slow late-summer months. While the total new-listing and for-sale inventory total is below the levels seen before the pandemic, the supply uptick helped Zillow’s outlook for home values to cool. 

As such, Zillow does expect 4.1 million existing home sales in 2023, an 18% decline compared to 2022. 

Will Buyers Be Able to Keep Up?

The lack of inventory in the real estate market has been a problem for a while and is one reason why property values keep rising. While more Americans are getting priced out of the market, demand for real estate is still up.

If Zillow’s predictions come true and prices continue to increase, will homebuyers reach a breaking point? 

Data suggests that home affordability is already at or near an all-time low. The median American family needs to spend 43% of their income in order to afford the median price of a home in the U.S., according to Charlie Bilello, chief market strategist at Creative Planning. 

And while the median sales price in the second quarter was $416,100, the median household income of repeat buyers was $96,000, or $71,000 for first-time homebuyers. Meanwhile, the National Association of Realtors’ Housing Affordability Index has steadily fallen over the last year to 87.8 in July, compared to the average of 103.8 in 2022 and 169.9 in 2020. For reference, a value of 100 means that a family making the median income can qualify for a mortgage on a median-priced home.

In other words, fewer first-time homebuyers can afford homes. According to data from the National Association of Realtors (NAR), only 26% of buyers were first-time buyers in 2022, compared to 34% in 2021. 

Younger buyers are also finding it harder to afford down payments. Indeed, 19% of younger millennials received down payment help from friends or relatives—more than any other generation did—while older millennials and Gen X buyers have had to delay buying homes due to debt.

Meanwhile, separate data from the NAR suggests that homebuyers are putting very little toward a down payment. Among buyers who financed a home, the median percent financed was 86%. 

The Bottom Line 

Of course, not everyone agrees with Zillow’s predictions. Morgan Stanley thinks home prices will drop by 2% in 2024, while Moody’s thinks high mortgage rates could put pressure on the market for years to come.

It’s possible that Zillow’s predictions are wrong, and prices will either drop lower or stagnate. The biggest unknown factor in all of this is what the Federal Reserve will do.

The Fed’s interest rate policy has been one of the biggest factors on housing inventory, as the central bank’s interest rate hikes have increased borrowing costs. If the Fed eases or even reverses its rate hikes, mortgage rates will likely fall, easing pressure on buyers and encouraging more owners to sell. But with inflation still far from its 2% mandate, the Fed is hesitating to pump the brakes on its rate hikes. 

With buyers already stretching their resources thin, it remains to be seen if current market conditions will hold or if real estate prices will reach a breaking point in the coming months. For many real estate investors, this means potentially playing out the waiting game for prices to drop. Of course, for those looking to sell, prices are already high, and if Zillow’s predictions are accurate, they could get even higher. Either way, many investors are on the fence right now, and it seems like it will stay that way for the foreseeable future.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.