Banking

Homebuyers are getting slammed by record-high prices. Here’s when economists say they’ll finally ease up.

  • In March, nationwide home prices increased year over year by 11.3%, according to CoreLogic.
  • It is the largest price growth since 2006, but growth is expected to stabilize by 2022.
  • Experts told Insider when they expect that stabilization to occur, and what will cause it.
  • See more stories on Insider’s business page.

Limited inventory and low mortgage rates have sparked rising homebuyer demand, which has resulted in astronomical home price growth over the past year. But there is some good news for prospective buyers trying to get a slice of the housing pie.

The current level of annual price growth is unsustainable and is expected to start dwindling by year’s end. By next year, price increases are expected to be more reasonable, meaning no more double-digit growth. Experts believe a few factors are at play: an expected increase in mortgage rates and supply. 

Why the massive increases?

It’s no surprise that prices have skyrocketed due to pandemic-related purchases and record-low interest rates. In March, finance analytics firm CoreLogic found that home prices grew 11.3% year over year, the largest percentage point since 2006. And, while it’s important to note that part of last March was crippled by the onset of the coronavirus pandemic, it’s far from the first double-digit increase we’ve seen. 

In February, home prices grew by 10.4% year over year, and in January they grew by 11.2%

Frank Nothaft, Corelogic’s chief economist, told Insider that he suspects double-digit home-price growth to continue through the rest of the spring and into the summer. However, by autumn annual growth will start to stabilize and by March 2022, it could be as low as 3.5%

But that rate of growth has the ability to fluctuate. 

Daryl Fairweather, a chief economist at real estate brokerage Redfin, told Insider that while she agrees annual home price growth will hit single digits, she expects it to float around the 5% mark, indicating a stronger hold on demand.

And while a 1.5% difference may not seem like a lot, for homebuyers looking to resell in the distant future, it matters.

“From the perspective of a homeowner, let’s say you bought a home this year and your home is only going to go up in value by 3.5%, that’s going to keep up with, about, inflation,” Fairweather said. “You’re not really building any equity in terms of dollars, which isn’t a problem if you bought a home to live in it.”

But if you bought the home to flip it, she continued, then that’s a problem. According to a report by real estate data company ATTOM Data Solutions, 57,155 single-family homes and condominiums in the US were flipped during the third quarter of 2020, and while that number was on the decline compared to previous quarters, it produced the highest profits for home sellers since 2000.

To put the percentages into context, here are some absolute figures: The median home sales price in March was $329,100, up from $280,700 during the same time last year, the National Association of Realtors found. While Nothaft and Fairweather both forecast that home price growth will dip by 2022, it’s important to remember that means prices will still increase — just at a slower rate than in 2020. 

Why is home price growth expected to slow?

The forecasted drop in annual home price growth is being weighed by two main factors: an expected rise in mortgage rates, and an expected rise in inventory. 

In April, the Mortgage Bankers Association forecasted that mortgage rates will float around 3.7% by the end of 2021. Currently, according to Freddie Mac, the average 30-year-fixed-rate mortgage is 2.96%.

Rising rates are expected to wane the current pressure caused by homebuyer demand, to an extent.

In addition, more homes are expected to hit the market. Many sellers, Nothaft explained, have held off on listing their homes because of the pandemic. But as the country moves into post-pandemic territory, he expects some of homeowners to take the plunge, which will subsequently help ease the supply shortage.

While Nofthat notes that CoreLogic currently forecasts 3.5% by March 2022, he said an increase in line with Fairweather’s prediction could also happen.

It will depend on the state of the economic recovery. On his call with Insider, Nothaft pointed to unemployment. In April, the national unemployment rate was 6.1%. Depending on how low the unemployment rate drops by 2022 will influence where annual home price growth stands, he added. 

A lower unemployment rate signals a homebuyer market with more purchasing power, which could lead to home price growth that goes beyond just matching inflation. 

But while there are a lot of factors at play, homebuyers can hold to the expectation that the growth of home prices will eventually stabilize.

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