Home ownership is the key to wealth development in the United States. Record high home prices are distorting the real estate market such that many first-time buyers are unable to buy a home. A national average housing price correction of 10-20% may be in the offing, but inflation and rising interest rates will more than offset the benefit of lower prices to make housing more unaffordable. Potential first time buyers will need to be sophisticated, agile, and disciplined to position themselves for opportunities that may arise in what will likely be a volatile market in the next few years.
Home prices are high by nearly all measures, but there is
wide regional variation. The CoreLogic
Home Price Index (HPI) posted the highest year-over-year growth in its 44-year
history by the end of 2021. CoreLogic last week reported 65 percent of
regional U.S. housing markets
are overvalued based on earnings to price ratios. Zillow
reported in February, 2022 that 481 cities nationwide have a typical home
value of at least $1 million and 49 more may join the list this year.
How Did We Get Here?
A perfect storm of decreased housing supply and increased demand
was underway in 2020. The U.S. had a systemic housing supply shortfall
of approximately 3 million homes caused by ten years of under production; homeowners
held
their houses longer – 13.5 years in 2020, up from approximately 10 years
before the housing collapse of 2008; Millennials,
the largest generation by population, entered their prime home purchasing years
in that timeframe and accounted for 37%
of home purchases in 2020. At the
same time, mortgage interest rates were historically low in the 4% range
following the 2008 market collapse.
Enter the Covid-19 pandemic and associated governmental policies to
further intensify the underlying issues of housing supply and demand.