Does Anyone Know What Will Happen With Home Prices? I Do.
Ok, that may be over-the-top bravado. But one of the things I’ve learned in nearly 50 years since law school graduation is to look to the past to figure out what the future likely holds. That maxim almost certainly holds true when thinking about the current real estate market and making guesses about what comes next.
To say home prices have been on a tear the last two and a half years is the understatement of the century. Since 1991, average annual price appreciation for the U.S. housing market has been 4.4%. In 2021 alone, home values in major U.S. markets increased by a whopping 18.7%, and since the pandemic hit in Q2 2020 prices are up nationally more than 30%. In some markets (for example Nashville and Florida, where my life and law practice are centered) price increases have been considerably greater than the national average.
Has there been a fundamental societal shift that justifies such a wild break from the historical trend line? Maybe, but it would be foolhardy to expect these levels to last. Here’s what will happen next.
Nothing Justifies Breaking with Historical Pricing Trends
My basic hypothesis is that home prices nationally will decline over time to get back in line with historical price trends. The pandemic accelerated purchasing, driven by Americans’ desire to expand or move, and that caused prices to shoot up. There are many arguments out there why this was some fundamental shift in society that will stay baked in, but I don’t buy it.
I don’t necessarily expect there to be a sharp decline in home prices; more likely the price chart will smooth out over the next several years. So many Americans locked in super low interest rates on purchases and refinancings over the last couple of years that, if anything, I expect the housing market – and those who earn their living from transactions – to be relatively slow and quiet for a couple of years while prices gradually decline. But honestly, no one, including me, has a crystal ball on this, and any particular “black swan” event could cause an abrupt change.
High Growth Markets are the Exception
My general hypothesis doesn’t apply so much to high growth markets. Certain markets are unquestionably in growth mode, including Nashville and much of Florida. Any market with an increasing population may very well justify increasing real estate prices due to higher demand. Of course, all other factors being equal, higher home prices should lead to more home construction, with corresponding price mitigation.
Nashville, in particular, is something of an anomaly because of the seismic shift it is undergoing. Indeed, Nashville is transforming from a small city to more of a major market with an unprecedented increase in population and interest. As a result, I think it is reasonable to believe that much – though certainly not all – of the post-pandemic home price increases will remain locked in.