The Housing Market Price Growth in 2021 Presents Challenges to America’s Future

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The tight housing supply, the extreme demand by buyers, and the overall irregular conditions we’ve faced for the last couple of years have made the housing market prime for home sellers. And, these conditions have also made it incredibly difficult for buyers and renters who are looking for housing.

According to a new report from ATTOM, a real estate data publisher, home seller profits rose 45% year-over-year in 2021, and are now up to $94,092 in average profit. In 2020, the average profit was $64,931—and just $55,000 the year prior.

The giant leap in profits is attributed to the continued acceleration of appreciation in markets across the country. The Case-Shiller Index now tracks at 276.12 points, up about 19% since this time last year—with over 90% of markets increasing profit margins throughout 2021.

So how is this massive growth affected buyers and renters—and how will it affect the housing outlook for these two groups in the future? Here’s what you should know.

Home buyers faced extreme challenges throughout 2021

At the start of the pandemic, the Fed lowered interest rates to near-record lows. This helped flood new buyers into the market, exacerbating the housing shortage and spiking prices—and rates continued to fall throughout 2021. This created a storm of home sales that culminated into one of the greatest housing markets on record for sellers—and one of the worst for buyers.

“What a year 2021 was for home sellers and the housing market all around the U.S. Prices went through the roof, kicking profits and profit margins up at a pace not seen for at least a decade. All that happened as the virus pandemic raged on, which actually helped drive the increases instead of [stifling] them,” said Todd Teta, chief product officer at ATTOM.

“Households that escaped job losses from the pandemic dove into the market, in large part as a response to the crisis. And the rising demand led the market boom onward. No doubt, there are warning signs that the surge could slow down this year. But 2021 will go down as one of the greatest years for sellers and one of the toughest for buyers,” Teta said.

Renters didn’t have it any easier

Both buyers and renters received the short end of the stick in 2021. Rental markets across the U.S. skyrocketed in price—making it a lot more expensive to pay for housing for current and would-be renters.

According to Zumper, rent prices rose 12% for a median one-bedroom apartment in 2021. In turn, rent prices hit an all-time high.

Of course, not all markets are created equally. Some saw faster price growth than others.

New York City, for instance, saw 25% growth in one-bedroom rental prices—with San Francisco trailing right behind. On average, all markets increased enough to push the national median into double-digit growth.

What these rising prices mean for buyers and renters in the future

These increased rent prices painted an especially bleak picture for younger renters and workers. For example, workers in the 16- to 19-year-old age bracket earn, on average, about $555 per week. For employees in the 20-24 age bracket, weekly earnings total about $633 on average.

And, considering that the national median rent for a one-bedroom apartment now costs, on average, about $1,374, it takes the average younger renter more than two weeks of work to gross enough funds to cover rent.

Considering the decreasing rate of homeownership amongst the millennial demographic compared to previous generations at their age, the prospects look no better for Gen Z. Not only is rent completely unaffordable for most young adults, but student debt also continues to soar—and most report having little to no savings.

Granted, most young adults in the 16-24 age demographic are either living with their parents or guardians or are in college—or both. But one of the age-old promises in this country is the opportunity for unparalleled upward financial mobility, which is driven primarily by the ability to own property and carve your own path in life.

But now, even with a bachelor’s degree, it’s becoming a lot harder to get started on the path towards the American Dream. And it’s due in large part to the fact that we have a severe affordability crisis in the United States.

Where does it all end?

I’ve repeated it in several articles, but it bears repeating again: The major issue is our severe shortage of housing units. The U.S. suffers from a shortage of a whopping 10 million units, and it’s been plaguing us since prior to the 2008 crash.

Without those units, we’ll continue to be in a supply deficit. And, based on the basic laws of supply and demand, if demand remains higher than supply, prices will stay elevated.

The housing market is, of course, unique. Factors like interest rates and wages play a role in demand. And, interest rates are expected to rise throughout 2022.

However, it’s worth noting that even though interest rates are set to rise, they are still on the lower end of the spectrum historically. What that suggests is that unless rates rise to the percentage points we saw throughout the 1980s—between 10-15%—the demand will likely remain elevated. And, that’s especially true for investors who recognize that anything below 8% is still low comparatively.

Final thoughts on the housing market challenges in the U.S.

Affordability issues are finally catching up to the sales market, so we are starting to see more and more buyers getting price-locked out of various markets. That’s especially true for first-time buyers.

Theoretically, this should help cool some of the demand. However, long-term prospects suggest that home prices will stay up—barring some sort of financial crash, anyway.

So, there is really no telling as to when the affordability crisis will end. At this point, it’s all just a matter of letting the market play out and then seeing where it takes us.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.