In 2021, home values in the U.S. appreciated at roughly 16%! To put this in historical perspective, homes have appreciated at a rate of 3 to 4% annually so 2021 was really an incredible year for home owners. Appreciation is often a function of supply and demand. Home supply is generally measured as months of supply available (i.e. how long will it take for all of the homes currently on the market to sell) and in 2021 the U.S. supply available hit a low of 3.5 months which we have only seen one other time in the roughly 60 year history of tracking this data. (For a great chart that shows U.S. home supply over time visit Monthly Supply of Houses in the United States (MSACSR) | FRED | St. Louis Fed). On the demand side of the equation, there were two actions that the Federal Reserve took (in an attempt to return the economy to full employment) that really stoked demand for U.S. housing. First, they cut the rate that they will lend at to 0%. Next, they began buying up mortgages after they were issued to home owners by banks. The combined effect of the Federal Reserve lending to banks at 0% and being willing to buy the mortgages from banks after they were issued resulted not just an increased willingness to lend on the part of the banks but an increased willingness to lend at an extremely low interest rate. These low interest rates mean that home buyers can afford to buy a home with a larger sticker price. For an illustration of this take a look at this table:
|Mortgage Loan Total||Duration||Interest Rate||Monthly Principal and Interest Payment|
As you can see, interest rates make all of the difference in the amount home buyers can afford. In 2019 the average 30-year mortgage had an interest rate of 4.46% and in 2021 the average rate was 2.74% (30-Year Fixed-Rate Mortgages Since 1971 – Freddie Mac).
So where are things headed from here? Well, on the supply side, we sit at about 6 months’ worth of housing supply nationally which is much more in line with the historic average. On the interest rate front, the Federal Reserve has already started to decrease the amount of mortgage backed securities they are purchasing and they have signaled an interest rate hike will occur in March. In anticipation for this, banks have already begun to increase the rates at which they will lend and the average mortgage rate sits at 3.45% as of January 2022. So, the typical drivers of housing prices are trending in a more normalized direction. The question becomes how high will supply and interest rates need to rise before we see a decrease in consumer demand causing home price appreciation to slow? To that I say, your guess is as a good as mine. I do not have a crystal ball but I’ll keep looking for one and if I find one, I’ll let you know.