US housing prices shot up during the pandemic. People spending all day at home wanted bigger houses, and the Fed fueled their demand with low interest rates. But home owners didn’t want to sell- the total number of homes on the market is less than half what it was a year ago. This combination of rising demand & falling supply has sent prices way up & cut the time homes spend on the market.
Contrary to popular belief, its actually rare for economists to make market forecasts and most of us aren’t especially well-equipped to do so- but I’m going to try anyway! I think home prices will almost certainly stop growing so quickly, and may actually fall, within two years.
Why? The end of the pandemic, the rise of new construction, and the end of low interest rates.
The Covid pandemic is what kicked off this price acceleration, so it makes sense that the return to normality brought by vaccines will extend to housing. While some of the Covid-induced demand shock will persist (remote work driving a shift away from apartments in superstar cities toward large houses in suburbs, rural areas, and second-tier cities), much of it will disappear over the next year.
The remaining demand for large houses in these areas will increasingly be accomodated by new listings. Sellers will feel safe listing and showing their houses again, and new construction begun in response to the house price boom will begin to hit the market. New construction never recovered from the 2007 housing bust, but its finally getting close. Builders have only somewhat ramped up construction in response to the demand spike because lumber prices have gone crazy– but sawmills will gradually catch up to increased demand this year, enabling the building boom to continue into next year.
Prices will stabilize in 2022 as Covid-induced demand subsides and this new inventory hits the market.
They may actually fall once the Fed gets around to raising interest rates, likely in 2023 (just a guess- I’m a visiting scholar at the Fed, but as a microeconomics researcher with no inside info).
While prices will eventually fall, I don’t necessarily expect them to fall below their current level, so this isn’t advice to wait for lower prices to buy. My best guess is that nationally we see a plateau around or slightly above current levels; though we may see large falls in places that saw the biggest Covid prices spikes, especially if they allow cheap and easy new construction (think a popular rural retreat).
Economist Writing Every Day 