Worried about home prices falling off a cliff? Don’t be. Home prices will continue their rise over the next decade and more. Here’s why.
US Home Prices Are Lagging Other Countries
Us home price growth lags that of other advanced economies. Simply put, there is a lot of room for home prices to keep on growing in the US.
Housing Inventory Is At An All Time Low
Housing inventory – i.e., availability of homes for sale – has a huge impact on home prices. If supply is higher than demand, sellers may be forced to reduce prices to sell off their properties.
However, the US housing market is massively undersupplied. In fact, the US has more registered realtors (1.46 million) than it has units for sale (1.3 million)!
Low supply translates to high price growth.
Young Adults Will Drive Demand For Homes
Demand is as important as supply in driving home price appreciation. Enter millennials.
Millennials and Gen Zs (or Zoomers) will drive demand for housing in the next 2 decades. Urban Institute projects that combined homeownership for this cohort will increase from 46% in 2020 to 64% by 2040.
Millennials have powered demand for homes during the pandemic, and will continue doing so for a few more years. Lance Lambert notes in Fortune Magazine: “We’re in the middle of the five-year period when the largest tranche of millennials, those born between 1989 and 1993, are hitting their thirties—the age when first-time homebuying really kicks into gear.”
Population and Wages Will Continue Growing
Population and wages are 2 of the most important demand factors. Both are projected to increase in the 2020s, following decades of growth.
While population growth in the US is slowing down, wages do not face any such constraint. A Freddie Mac study shows that income is far more important a factor in home price appreciation than population.
Banks Are Following Strict Underwriting Practices
Poor lending practices by banks in the early 2000s led to a wave of defaults and foreclosures during the Great Financial Crisis. Banks and other lending institutions seem to have learnt their lesson. Credit availability in 2021 is very low.
Low credit availability reduces demand, but more crucially, it also reduces the risk of future oversupply from foreclosures. This makes investments in the housing market a lot more secure.
Home Prices Are Resilient
There’s a reason home prices have been increasing for over a 100 years – they are remarkably resilient to downward pressures. Recessions, stock market crashes, rising interest rates…none of these factors have slowed down home price appreciation in the past.
All indications point in one direction – UP!