MADISON, Wis.—In a housing market that has seen skyrocketing valuations over the past few years, could the real home price growth rate turn negative?
According to four different analysts, that could happen within the next two years—or even in 2022.
As part of CUNA Mutual Group’s February Trends Report, the company’s economists noted that real home prices (inflation-adjusted) increased 8.7% in 2021, the fourth-fastest pace in modern history, a trend line that concerns regarding affordability and home price bubbles.
Nominal home prices rose 15.7% in 2021, significantly faster than the cost of living as measured by the Consumer Price Index, which rose 7.0%.
“If we subtract this 7.0% inflation rate from the 15.7% nominal home price growth rate, we can calculate the real home price growth rate of 8.7%. This is the 10th consecutive year of nominal home price growth exceeding the rate of inflation of the goods and services,” the company stated.
A Cyclical Market
CUNA Mutual Group reminded the housing market moves in cycles.
“In the late 1980s, the housing market experienced five years of positive real home price appreciation, followed by approximately five years of negative real price growth rates in the early 1990s,” the CUNA Mutual analysis stated. “Then, there was a housing bubble for nine years from 1997 to 2005, which was followed by six years of negative real home price growth rates. Sometime in the next few years, we can expect real home price growth rates to turn negative as nominal home price growth rates fall below the rate of inflation for goods and services.”
Bill Handel
One possible economic scenario in which this decline might happen would be the byproduct of a rise in the inflation rate, which will push up long-term interest rates and the 30-year mortgage interest rate.
“This will, in turn, reduce the demand for housing and bring down nominal home price growth rates, the company stated.
CUNA Mutual isn’t alone in its forecast.
Bill Handel, SVP-research with Raddon, noted that in
Decline Could Happen in 2022
Raddon’s Bill Handel pointed out that in 2021, home prices rose—in nominal terms—by 16%.
“In 2022, the expected increase in nominal value across the U.S. is 5%,” said Handel. “If we continue to see inflation at its current levels, real home values will actually decline in 2022.”
What is the likelihood that inflation stays at current elevated levels?
“Unfortunately, it’s quite high for a few reasons,” explained Handel. Those reasons include:
“Elevated prices of goods are beginning to impact wage demands in a labor market that is very tight. Wage inflation is much more difficult to tame than is inflation in the prices of goods. Typically, only recessions are the cure for wage inflation,” he said.
Government actions in response to the pandemic, including stimulus and unprecedented growth in the money supply, have left people with ample funds in their checking and savings account and contributed to the growth in inflation.
“International instability…The war in Ukraine is putting further strain on the supply chain and this will continue to ratchet up the cost of goods and resulting inflation,” Handel said.
“All of these factors are leading to the notion that the real value of residential real estate could actually decline, as soon as 2022,” he concluded.
Robert Eyler
An Effect from War in Ukraine
Robert Eyler, professor of economics at Sonoma State University in Rohnert Park Calif., who consults with the California and Nevada Leagues, suggested the war in Ukraine could “easily” tip the scales in terms of the recent growth of home prices versus inflation rates.
“It could, in such that housing prices nominally growing at 5% may not outpace inflation this year if rising gas prices begin to move through already precarious supply chains and push up price pressure,” Eyler told CUToday.info. “However, it is more likely that housing prices will flatten faster than expected with general global and financial market uncertainty, especially if commodities look like they act as better short-term hedges against inflation or a short-term gold rush based on Eastern Europe.”
In the medium term, the forecast for housing—especially in California—remains positive as construction is likely to be slow and wealth converting from equities to real assets should continue to spur on global demand to live in the Golden State.
Feeling the Pressure
Eyler said to expect pressure on 10-year Treasuries and 30-year fixed and adjustable mortgage rates based on a combination of factors, now exacerbated by global risks.
“Though, for the U.S., there may be a race to safety in the short term to push down the long end of the market, so the puzzle the Federal Reserve has to solve just got a little weirder,” Eyler said.
Curt Long, NAFCU
A Deficit in Housing
NAFCU Chief Economist and Vice President of Research Curt Long agreed with Eyler that given where oil prices have been going, it is certainly possible that headline inflation could outpace home price growth in the foreseeable future.
“But the rapid appreciation of housing is a result of supply shortages, and that doesn’t look likely to improve any time soon,” Long said. “Freddie Mac estimates the housing supply deficit reached 3.8 million units in 2020, and it has only grown since then. There are numerous reasons why construction has failed to keep up with demand, including rising material costs, labor shortages, restrictions on land use, and local opposition.
“We are also in the midst of a demographic-driven surge in housing demand as Millennials age into their prime homebuying years,” continued Long. “The eye-popping price growth we have seen recently in the housing market is not being driven by speculation or easy credit, but by a fundamental mismatch between supply and demand. Unfortunately, there does not appear to be any relief in the near future.”
According to four different analysts, that could happen within the next two years—or even in 2022.
As part of CUNA Mutual Group’s February Trends Report, the company’s economists noted that real home prices (inflation-adjusted) increased 8.7% in 2021, the fourth-fastest pace in modern history, a trend line that concerns regarding affordability and home price bubbles.
Nominal home prices rose 15.7% in 2021, significantly faster than the cost of living as measured by the Consumer Price Index, which rose 7.0%.
“If we subtract this 7.0% inflation rate from the 15.7% nominal home price growth rate, we can calculate the real home price growth rate of 8.7%. This is the 10th consecutive year of nominal home price growth exceeding the rate of inflation of the goods and services,” the company stated.
A Cyclical Market
CUNA Mutual Group reminded the housing market moves in cycles.
“In the late 1980s, the housing market experienced five years of positive real home price appreciation, followed by approximately five years of negative real price growth rates in the early 1990s,” the CUNA Mutual analysis stated. “Then, there was a housing bubble for nine years from 1997 to 2005, which was followed by six years of negative real home price growth rates. Sometime in the next few years, we can expect real home price growth rates to turn negative as nominal home price growth rates fall below the rate of inflation for goods and services.”
Bill Handel
One possible economic scenario in which this decline might happen would be the byproduct of a rise in the inflation rate, which will push up long-term interest rates and the 30-year mortgage interest rate.
“This will, in turn, reduce the demand for housing and bring down nominal home price growth rates, the company stated.
CUNA Mutual isn’t alone in its forecast.
Bill Handel, SVP-research with Raddon, noted that in
Decline Could Happen in 2022
Raddon’s Bill Handel pointed out that in 2021, home prices rose—in nominal terms—by 16%.
“In 2022, the expected increase in nominal value across the U.S. is 5%,” said Handel. “If we continue to see inflation at its current levels, real home values will actually decline in 2022.”
What is the likelihood that inflation stays at current elevated levels?
“Unfortunately, it’s quite high for a few reasons,” explained Handel. Those reasons include:
“Elevated prices of goods are beginning to impact wage demands in a labor market that is very tight. Wage inflation is much more difficult to tame than is inflation in the prices of goods. Typically, only recessions are the cure for wage inflation,” he said.
Government actions in response to the pandemic, including stimulus and unprecedented growth in the money supply, have left people with ample funds in their checking and savings account and contributed to the growth in inflation.
“International instability…The war in Ukraine is putting further strain on the supply chain and this will continue to ratchet up the cost of goods and resulting inflation,” Handel said.
“All of these factors are leading to the notion that the real value of residential real estate could actually decline, as soon as 2022,” he concluded.
Robert Eyler
An Effect from War in Ukraine
Robert Eyler, professor of economics at Sonoma State University in Rohnert Park Calif., who consults with the California and Nevada Leagues, suggested the war in Ukraine could “easily” tip the scales in terms of the recent growth of home prices versus inflation rates.
“It could, in such that housing prices nominally growing at 5% may not outpace inflation this year if rising gas prices begin to move through already precarious supply chains and push up price pressure,” Eyler told CUToday.info. “However, it is more likely that housing prices will flatten faster than expected with general global and financial market uncertainty, especially if commodities look like they act as better short-term hedges against inflation or a short-term gold rush based on Eastern Europe.”
In the medium term, the forecast for housing—especially in California—remains positive as construction is likely to be slow and wealth converting from equities to real assets should continue to spur on global demand to live in the Golden State.
Feeling the Pressure
Eyler said to expect pressure on 10-year Treasuries and 30-year fixed and adjustable mortgage rates based on a combination of factors, now exacerbated by global risks.
“Though, for the U.S., there may be a race to safety in the short term to push down the long end of the market, so the puzzle the Federal Reserve has to solve just got a little weirder,” Eyler said.
Curt Long, NAFCU
A Deficit in Housing
NAFCU Chief Economist and Vice President of Research Curt Long agreed with Eyler that given where oil prices have been going, it is certainly possible that headline inflation could outpace home price growth in the foreseeable future.
“But the rapid appreciation of housing is a result of supply shortages, and that doesn’t look likely to improve any time soon,” Long said. “Freddie Mac estimates the housing supply deficit reached 3.8 million units in 2020, and it has only grown since then. There are numerous reasons why construction has failed to keep up with demand, including rising material costs, labor shortages, restrictions on land use, and local opposition.
“We are also in the midst of a demographic-driven surge in housing demand as Millennials age into their prime homebuying years,” continued Long. “The eye-popping price growth we have seen recently in the housing market is not being driven by speculation or easy credit, but by a fundamental mismatch between supply and demand. Unfortunately, there does not appear to be any relief in the near future.”
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