What Lies Ahead

With home prices in many local markets reaching record levels in 2020 and 2021, homeowners and prospective homeowners alike wonder what lies ahead.

What has caused home prices to appreciate so much over the last two years?

Strong demand and a lack of supply. According to the Federal Housing Price Index, national average home prices were 15% higher in 2021. Historically, prices have grown at a pace of about 5% per year.

The housing market was already tight before the pandemic (see below). But demand accelerated after the Federal Reserve drove down borrowing costs to record lows to support economic activity. This made the payment on a home more manageable. At the same time, the number of homes available for sale in the U.S. declined as many were unwilling to move due to COVID-19 conditions.

What will happen to home prices in 2022 and 2023?

New and existing home sales have slowed slightly in recent months amid the jump in mortgage rates. The 30-year fixed rate mortgage started the year at 3.1% and ended the month of June at 5.7%.  Even with the increase, the median sales price rose to a new record high of $416,000 in June.

Though demand has slowed, the number of homes available for sale has remained close to historical lows.  As such, home prices are still likely to grow, but at a much slower pace. Many are predicting growth in the 3-8% range. So, potential buyers may have less competition for properties, but property values are still likely to increase on average.

Are we in a housing bubble? Will there be a housing market crash similar to 2007–08?

No, we do not see current market conditions as being in a “bubble,” and we certainly do not see a correction similar to the crash of 2007–08 as likely.

With the recent increase in home prices, will housing affordability become an issue for the U.S. economy?

Today’s high property prices and rising mortgage rates make housing increasingly unaffordable for a growing share of the population. 

Unfortunately, housing affordability has been a problem in the economy for several years. Since the years immediately following the Great Recession (2007–09), the economy has suffered from a lack of affordable housing — homes priced in a range that first-time buyers or families with modest incomes can afford. Given the tight supply of homes, builders have been incentivized to build larger homes with larger profit margins.  As availability in these higher-priced segments grows, we have seen some evidence of builders slowly moving down the price-point scale.