We are in the middle of an unprecedented stretch of the highest home prices in the nation’s history. The 18.8% increase in home prices over the past 12 months is significantly higher than the 14% increase leading up to the housing bubble in 2008. But housing economists continue to stress that simple laws of economics will eventually cool down this red-hot market. Why? Home prices cannot grow faster than income forever, especially not at the current rate of home prices growing six times faster than wages. But when will the frenzy end? Not until at least after the spring buying season.
Devyn Bachman, vice president of research at John Burns Real Estate Consulting, explains, “We are right in the heart of spring homebuying season, and it’s wild and it’s crazy out there. It is causing some frustration at this point in the real estate market. It’s going to be tough [for buyers] through at least the spring.”
Part of that frustration comes from the lack of inventory on the market. Economists believed that 2022 would be the year the real estate market would normalize, especially with the end of COVID-19 mortgage forbearance protections. Most experts were patiently waiting to see more homes on the market and buyers pushing back against sky-high prices, but that did not happen. In fact, housing inventory dried up even further. In March of 2021, Zillow.com reported housing inventory 26% below pre-pandemic levels; it is now 42% below that level. And that is not just a few of the hottest markets – it’s a nationwide problem.
One reason for the lack of inventory is the sheer lack of new development. In 2005, the nation put up 25 million new homes. By 2012, that number dropped to just 9.4 million. While the new construction market has made gains in the past decade, it has not been enough to keep up with millennials who are ready to buy their first home. Lack of new construction, combined with young families seeking their first homes, has caused inventory to dry up from coast to coast.
But there is hope for prospective homebuyers. According to Fannie Mae, home prices will continue to increase in 2022 by an expected 11.2% rate. However, Fannie Mae is predicting a much smaller 4.2% increase in 2023. According to industry insiders, record breaking list prices and rising mortgage rates will force the market to steady itself as buyers increasingly push back.