Q: Home prices in my area have been booming. Why is this happening, and do you expect it will continue?
A: This question is on the minds of many Americans – partly because of the prevalence of home ownership in the U.S. and partly because it’s hard not to notice surging home prices.
On average, U.S. home prices have climbed 4.1 percent on an annual basis since 1987, according to Fortune magazine. However, in its latest forecast, Fannie Mae indicated that it expects median home prices to rise 7.9 percent between the fourth quarter of 2021 and the fourth quarter of 2022—twice the long-term average.
There are several drivers of this phenomenon. But, as always, market behavior comes down to supply and demand. There has been too much demand for the supply of available homes. The housing supply has been low for more than a decade. The housing crash in the late 2000s devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages. This placed more pressure on existing homes to meet demand from prospective buyers.
More recently, with the shift to remote work and education and low interest rates, many people looked for more space. This increase in demand happened as pandemic-induced labor shortages, supply-chain issues, and rising raw material costs stymied construction of new homes.
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing to lower mortgage payments or cash out kept some homeowners in place. And government mortgage forbearance programs have kept families from losing their homes through the pandemic but also kept homes that might have otherwise been foreclosed on off the market. The pandemic also made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.
Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers. In fact, prices are so high some buyers are backing off. But demand remains strong and will outstrip housing supply for the foreseeable future. Near-term relief might come if high prices inspire more homeowners to sell and if the end of government programs puts more foreclosed homes on the market.
