Will U.S. home prices continue to increase this year?


The median price of an existing home in the United States grew by 16.5% in 2021, according to the National Association of Realtors (NAR). The gain follows a 9.4% price increase in 2020. 

Approaching the traditional spring selling season, home prices in most local markets are at, or near, record levels. The high prices — combined with limited housing availability and rising mortgage rates — have cooled demand somewhat in recent months, but the number of potential buyers still exceeds the available supply of homes, in our view. 

 

Graph shown for illustrative purposes only. Client experience may vary. 

 

In December, there were a record low 790,000 existing homes available for sale in the United States, per the NAR. In terms of months’ supply — a measure of how long the current number homes on the market would last at the current sales rate — the 1.8 months’ supply in December was also a record low. Historically, a balanced real estate market offers about 6.0 months’ supply. 

Despite these conditions, we believe it will remain a “seller’s market” in 2022, and home prices are likely to see further appreciation. Overall, we forecast U.S. median home prices to grow by about 8% in 2022. 

Why is the market so tight? 

Following the housing market crash of 2008–2009, many homebuilders went out of business and many workers migrated to other industries. Over the following 10 years, new-home building lagged the growing demographic need in the United States. 

In our view, the U.S. economy requires approximately 1.3 million new housing units be made available each year, on average, to keep up with population growth and the loss of homes due to accidents, natural disaster or obsolescence.  

Builders are ramping up new construction, but it could take years for the real estate market to rebalance. Here’s why: 

  • Construction was started on 1.6 million new housing units in 2021 (this number includes single-family units as well as apartments), according to the Census Department. 
  • It will take quite a bit of additional time to make up for the average of just 990,000 new housing units built per year from 2009 through 2020. That’s a supply deficit of approximately 310,00 units per year, or 3.4 million total homes during that 11-year window.  

Are home prices in a bubble? 

Surprisingly, last year’s price increase far exceeded the yearly gains during the housing bubble period more than a decade ago. From 2002 through 2007, median existing home prices rose at an average pace of 8.1% per year, reaching a peak rate in 2005 with a gain of 12.9%, according to the NAR. However, unlike the excess supply available during that prior period, today’s lack of homes for sale should offer strong support to prices over the intermediate term, at least. 

A boost in homeowner equity  

Housing is a significant source of consumer wealth that’s often overlooked when talking about total household finances. Rising home values and the growing equity position of homeowners have been quietly boosting consumer wealth materially in recent years.  

At the end of third quarter 2021, the Federal Reserve estimated homeowners held 68.8% of the equity in their homes. This is a level not seen since 1988, and one that we believe will rise materially in the years ahead. 

Just as encouraging as the level of homeowners’ equity is how fast it’s been growing.  

  • From third quarter 2020 to third quarter 2021, homeowner’s equity position grew by a sharp 2.4 percentage points.  
  • A similar gain over the next year would put homeowner equity at 71.2% — the highest level since 1960, if achieved. 

Several factors are likely to contribute to further gains in that metric over the quarters and years ahead, in our view.

  • Home values are rising, and increases in value benefit the owner. 
  • Mortgage debt is likely to grow at a slower pace as rising mortgage rates should greatly reduce refinancing activity.  
  • New mortgage originations are likely to be constrained by the limited availability of homes for sale. 

Graph shown for illustrative purposes only. Client experience may vary. 

In summary 

Home prices have been rising at a brisk pace the last few years, thus negatively affecting affordability. But that alone does not mean prices are in a “bubble.” A lack of availability in the marketplace should remain a strong source of support for prices over the intermediate term, in our opinion. Talk to your Ameriprise financial advisor about how your home figures into your broader financial portfolio and goals. 

Graph shown for illustrative purposes only. Client experience may vary.