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Will U.S. home prices continue to increase this year?

Photo of newer looking homes
Russell Price, Chief Economist – Ameriprise Financial
Updated April 19, 2022

The median price of an existing home in the U.S. grew by 16.5% in 2021, according to the National Association of Realtors (NAR). The gain follows a 9.4% price increase in 2020. 

As the spring selling season gets underway, home prices in most local markets are at, or near, record levels. The high prices — combined with limited housing availability and rising mortgage rates — have cooled demand somewhat in recent months, but the number of potential buyers still exceeds the available supply of homes, in our view. 

Bottom line: We believe it will remain a “seller’s market” for the remainder of the year, and home prices are likely to see further appreciation. For 2022, we forecast U.S. median home prices to grow by about 8%. 

Here’s what you need to know about the current housing market and the direction of home prices for 2022.

Inventory has never been tighter

January saw a record low 1.3 months’ supply of homes on the market. Even on an absolute basis, the number of homes on the market in January (750,000, according to the NAR) was about 31% of the average number for sale during the 1980s (about 2.45 million) – a time when the general population was about a third smaller. Historically, a balanced real estate market offers about 6.0 months’ supply. 

Graphic showing number of existing single family homes for sale since 1990.
Graphs shown for illustrative purposes only. Client experience may vary.
Graphic showing number of existing single family homes for sale vs growing US population

New-home construction is coming – but it will take time to feel effects

Following the housing market crash of 2008–2009, many homebuilders went out of business and many workers migrated to other industries. Over the following 10 years, new-home building lagged the growing demographic need in the United States. 

In our view, the U.S. economy requires approximately 1.3 million new housing units be made available each year, on average, to keep up with population growth and the loss of homes due to accidents, natural disaster or obsolescence.  

Builders are ramping up new construction, but it could take years for the real estate market to rebalance.

Here’s why: 

  • Construction was started on 1.6 million new housing units in 2021 (this number includes single-family units as well as apartments), according to the Census Department. 
  • It will take quite a bit of additional time to make up for the average of just 990,000 new housing units built per year from 2009 through 2020. That’s a supply deficit of approximately 310,000 units per year, or 3.4 million total homes during that 11-year window.  

This isn’t a repeat of the 2007 housing bubble

Surprisingly, last year’s price increase far exceeded the yearly gains during the housing bubble period more than a decade ago. From 2002 through 2007, median existing home prices rose at an average pace of 8.1% per year, reaching a peak rate in 2005 with a gain of 12.9%, according to the NAR. However, unlike the excess supply available during that prior period, today’s lack of homes for sale should offer strong support to prices over the intermediate term, at least. 

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Homeowner equity has not been this high since 1988

Housing is a significant source of consumer wealth that’s often overlooked when talking about total household finances. Rising home values and the growing equity position of homeowners have been quietly boosting consumer wealth materially in recent years.  

At the end of third quarter 2021, the Federal Reserve estimated homeowners held 68.8% of the equity in their homes. This is a level not seen since 1988, and one that we believe will rise materially in the years ahead. 

Just as encouraging as the level of homeowners’ equity is how fast it’s been growing.  

  • From third quarter 2020 to third quarter 2021, homeowner’s equity position grew by a sharp 2.4%
  • A similar gain over the next year would put homeowner equity at 71.2% — the highest level since 1960, if achieved. 

Several factors are likely to contribute to further gains in that metric over the quarters and years ahead, in our view.

  • Home values are rising, and increases in value benefit the owner. 
  • Mortgage debt is likely to grow at a slower pace as rising mortgage rates should greatly reduce refinancing activity.  
  • New mortgage originations are likely to be constrained by the limited availability of homes for sale.
Graphic showing homeowner equity since 1988
Graph shown for illustrative purposes only. Client experience may vary.

Fed rate increases will likely have a modest impact

In an effort to tame inflation, the Federal Reserve raised interest rates by 25 basis points in March and signaled more increases could be on the way, prompting some consumers to wonder if housing prices will soon begin to drop.

In our view, we predict that Fed action will have a more modest effect due to strong demand and the low inventory of homes for sale. Higher interest rates are likely to slow the pace of activity in the housing market. That means prices are likely to see further appreciation, but at a slower pace.

In summary 

Home prices have been rising at a brisk pace the last few years, thus negatively affecting affordability. But that alone does not mean prices are in a “bubble.” A lack of availability in the marketplace should remain a strong source of support for prices over the intermediate term, in our opinion.   

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. 

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.  

This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future results.  

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. 

Ameriprise Financial cannot guarantee future financial results.

Ameriprise Financial Services, LLC. Member FINRA and SIPC