The national median sales price for a home in America ended 2021 at a record $346,900, up more than $50,000 in a single year. Estimates for this year vary widely, but one example is from Zillow, which predicts home prices this year to jump another 16.4%.
And look at the inventory picture. The National Association of Realtors (NAR) said unsold listings ended 2021 at an all-time low, down 18% in a single month to 910,000 homes for sale, as December marked the 31st straight month of year-over-year declines. That's 1.8 months' worth of inventory at the current sales pace. The NAR considers six months of inventory to be the desired pace.
Record-low inventory and strong demand will continue to bolster sales in a market that will be tempered by rising interest rates. The national average for a 30-year fixed-rate mortgage has broken through 4%, and with inflation rearing its ugly head ever higher, there has been talk of a real estate bubble, like the one that burst in 2008-2009 and helped cause the Great Recession.
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But that was then. There are several reasons why we're not likely in a bubble. One of the biggest is the continuing demand for housing to accommodate a growing population of homebuyers. While there will be ups and downs, of course, that simple fact alone means the housing market will likely be strong for years to come.
Millennials are building their nests, buffeted by economic headwinds
Millennials are coming of age. That cohort of Americans born from 1981 to 1996 is moving through their peak homebuying and family-building years, and at an estimated population of 72.1 million as of 2019 according to Statista, this generation has surpassed baby boomers as the largest segment among America's 330 million residents.
The American Dream of homeownership is hardwired into our national psyche, it seems, and this generation is no different. The standard deduction that's reached $12,950 for single filers and $25,900 for joint filers has blunted the appeal of the mortgage interest tax break, but that hasn't seemed to make a dent in the demand for owning your own home. Now it remains to be seen if economic headwinds such as inflation and rising mortgage rates will blunt the purchase market.
Affordability is a growing issue. The National Association of Home Builders (NAHB) determined last year that every $1,000 increase in the median price of a new home prices 153,697 households out of the market. Adding 25 basis points to the 30-year fixed rate of 2.8% does the same thing to a whopping 1.29 million households, the NAHB said in that study.
Meanwhile, the NAR just reported that there were only 245,300 homes on the market that were affordable to households earning $75,000 to $100,000, down from 656,200 in December 2019, just before the pandemic began. That's equivalent to one affordable listing available for every 65 households, a sharp drop from one affordable listing for every 24 households in 2019.
Affordability will remain an issue. It always has been. It always will be. But people are going to continue to seek to buy their own homes. Where they do is a key point for real estate investors.
Investment opportunities among segments and geography
All real estate is local, and each market will present its own opportunities. The pandemic-driven need for more space and soaring ability to work from home is driving demand in the suburbs and beyond. Many small markets, especially in the Midwest but really all over the country, still offer very affordable housing stock, especially to those who can take their higher-paying jobs with them.
And, of course, there are other ways to invest in the housing market besides buying and then renting or flipping a home. Rental demand remains strong, and there are multiple real estate investment trusts (REITs), crowdfunding, and individual opportunities awaiting investment dollars.
But as long as buying your own house (or condo or townhouse) remains a pivotal piece of the American way of life, that huge segment of the housing market should continue to steadily grow, and steady growth is the linchpin for building long-term wealth.
