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You can say the real estate market is “cooling” — just look at fewer monthly sales — but pricing is more complicated. No one seriously believes that 14% annual price increases can be maintained. At the same time, while less price appreciation can be a scary sign to some, the greater point is that because of inventory shortages, massive demand, and cheap financing, residential real estate is likely to remain an appreciating asset in most areas.
Figures from the National Association of Realtors (NAR) show how existing home market activity has changed so far in 2021.
Prices. The typical existing home sold for $308,000 in January versus $356,700 in August, an increase of $48,700.
Price growth. In January existing home prices were 14.1% higher than a year earlier, in August they were up 14.9% steeper than twelve months before.
Sale volume. Between January and August annualized sales for existing homes went from 5,910,000 units to 5,190,000 units, a decline of 720,000 units.
Sale times. Homes typically sold in 21 days in January versus 17 days in August, a four-day drop. In January 2020 the typical home took 43 days to sell.
Unsold inventory. In January there were 1.04 million existing home units available for purchase, a number that rose to 1.29 million by August, up 250,000 units.
Mortgage rates. Monthly mortgage rates averaged 2.74% in January and 2.84% in August, up .10% according to Freddie Mac.
It’s hard to see any of this as bad from the perspective of a property owner or real estate investor. Prices are up and selling times are down. Importantly, the imbalance between supply and demand is likely to continue because pent-up demand remains in the system. The population continues to grow and, according to a June study by NAR, “the underbuilding gap in the U.S. totaled more than 5.5 million housing units in the last 20 years.”
<h2>Cautions</h2>
The numbers above reflect national figures, but local trends may be different. Prices may not go up as much in a given neighborhood, and in some areas they may have gone down. In the second quarter, NAR reported that home values rose in 182 out of 183 metropolitan statistical areas (MSAs). The one MSA exception was Springfield, IL. No doubt there are also streets, neighborhoods, and ZIP codes where pricing is soft.
Also, the inventory issue is more complex than the figures might suggest. Supply is especially short for those seeking entry-level and middle-income housing. There are high-cost metro areas where supply is nowhere near adequate, but there are also rural and secondary markets where homes are both affordable and readily available.
Another caution concerns the burgeoning work-from-home (WFH) movement. Some companies gleefully support the concept while others are strongly opposed. The National Association of Home Builders says 2020 Census figures show “a sharp upswing in the percentage of new homes started with 4 or more bedrooms, unlike in prior recent years.” This sudden interest in bedrooms may well be a byproduct of more WFH demand, a trend that favors larger homes with more space for potential offices.
<h2>Looking ahead</h2>
But what about going forward? Will real estate owners continue to have good luck?
The Federal Reserve is on course to raise interest rates and cut monthly mortgage-backed security purchases in 2022. Either action, or both, will likely cause mortgage rates to rise. Higher rates can lead to fewer home sales, less price growth, and maybe even a price retreat in certain communities.
“Mortgage rates rose across all loan types this week as the 10-year U.S. Treasury yield reached its highest point since June,” said Sam Khater, Freddie Mac’s Chief Economist. In late September he said that “many factors led to this increase, including the Federal Reserve communicating that it will taper its support of the capital markets, the broadening of inflation and emerging energy supply shortages which compound other labor and materials shortages.”
Khater continued, “We expect mortgage rates to continue to rise modestly which will likely have an impact on home prices, causing them to moderate slightly after increasing over the last year.”
Translation: It’s unrealistic to believe that home price increases can continue at recent levels of 14% and more. However, because of missing inventory, strong demand, and mortgage rates near historic lows – and assuming we can avoid a pandemic setback – there’s still room for additional price growth in many areas.
<h2>How much can the Fed push?</h2>
The Fed seeks to manage the economy in such a way that inflation is limited while full employment is encouraged.
However, that’s not the whole story. The Fed does not operate in a vacuum. There are other, less visible, factors forcing the Fed to act with moderation.
For instance, the Fed has surely noticed that the government has taken on trillions in new debt in the fight against Covid-19. In late September, the government owed $28.4 trillion, according to the Peter G. Peterson Foundation. A mere .25% interest rate increase could potentially cost the government an extra $62 billion a year. So while the Fed can raise bank rates, it needs to watch out for the collateral damage such increases can create.
The nation’s banks certainly would like to see higher rates, but the Fed may not be too impressed with their pleas. In the second quarter, the banks had a net income of $70.4 billion — up 281% from a year ago. Not one of the Nation’s almost 5,000 commercial banks failed during the first half of 2021.
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The real unknown is what happens with the pandemic. Will something worse than the delta variant emerge, or will cases and deaths slowly ebb? The Fed surely doesn’t want to slow the economy only to see the virus return in full force and close down businesses across the country.
“If you’re the Fed, you’ve helped keep the economy afloat during the past two years,” said Rick Sharga, Executive Vice President with <a href="https://www.realtytrac.com/" target="_blank" rel="noreferrer noopener">RealtyTrac</a>. “Maybe now is the time for an adjustment here or there, a tweak to keep critics at bay, but nothing major or radical that might undo the work done to this point.”
<h2>The real world</h2>
Let’s imagine that home price increases slow. Is that really a surprise? Does anyone believe that property values can increase 10%, 12%, 14%, or more year-after-year? A more realistic market is still a market with potential. Prices may moderate and interest rates may move modestly higher, but going forward there will still be foreclosures and short sales, homes to flip, and properties to rent and hold. Pent-up demand has not disappeared. Times may be changing, but good opportunities surely remain.

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