Mortgage rates at record lows and a lack of available inventory are sustaining the US housing market’s demand. While affordability concerns continue to grow, low mortgage rates, increased savings, and a strengthening job market all contribute to making homeownership more accessible to a wide number of prospective buyers.
Housing price trends can vary widely from geographic region to region. Even within the same city, numbers can vary widely. Areas that are experiencing new growth can show significant price appreciation while areas across town can in decline. Rising or declining prices in national and regional statistics don’t always account for the reality of local markets.
According to the National Association of Realtors, in 2020, the number of home sales increased significantly and surpassed 2007 levels. Despite the economic uncertainty caused by the pandemic, many buyers took a more serious approach to homeownership than ever before. It resulted in a massive, but brief, increase in homeownership as a result of drastically reduced spending. The housing market has been particularly robust this year, with high demand for homes in almost every area of the nation.
According to realtor.com®, numerous cities that experienced bidding wars earlier this year are now experiencing a more tranquil housing market, with price reductions bringing sky-high asking prices back down to earth. While the market continues to be active, there are fewer competing offers and contingencies have returned, both of which are clear indicators of a healthier housing market. For buyers, approachable mortgage rates and less competition mean increased chances of finding the perfect home. Nonetheless, buyers of a median-priced home will pay an additional $142 toward their mortgage payment today compared to a year ago.
While bubbles may be (though rarely are) identified in progress, bubbles are usually measured in hindsight, after a market correction. The bubble, combined with the inability of a large number of homeowners to pay their mortgages as their low introductory rate mortgages reverted to regular interest rates, lead to large double-digit declines in home values.
Homeownership continues to be a great way to build wealth. Accounting for inflation, home prices have jumped 118% since 1965, while income has increased by only 15%.
Over the past year, U.S. home prices are up a record 19.8%. You don’t need to be an economist to know that the current level of growth—which is faster than the run-up to the 2008 financial crisis—isn’t sustainable.
But where will this historically competitive housing market go next?
According to the latest forecast put out by Fannie Mae, median home prices are expected to rise 7.9% between the fourth quarter of 2021 and the fourth quarter of 2022. While that would mark a slowing from the extreme price growth we’ve seen this year, it would still represent strong growth by historical standards. (On average, U.S. home prices have climbed 4.1% on an annual basis since 1987.) So, put another way: The housing market, at least in the eyes of Fannie Mae, is set to return to a normal-ish level of price appreciation.
Fannie Mae also expects mortgage rates to climb next year, with the average 30-year fixed rate rising from 3.1% to 3.4%. But the downward pressure on prices from rising rates, the government-sponsored enterprise says, won’t be enough to actually pull prices down.
According to the chief economist of Fannie Mae, “Mortgage rates may rise in response to the tighter environment, but we expect the severe shortage of homes for sale to remain the primary driver of strong house price appreciation through at least 2022, limiting interest rate effects on home sales and home prices.”