Why Are Home Prices Rising So Fast in 2021?

Why are home prices rising so fast in 2021, even with a pandemic going on? And will they ever slow down?

These are common questions among home buyers, homeowners, agents, and others with a vested interest in the real estate market. Today, we will address those questions in detail.

In short: The main reason why home prices are rising so fast in 2021, despite the pandemic, has to do with a supply and demand imbalance. Housing demand skyrocketed during the second half of 2020, and that caused inventory levels to plummet nationwide. These trends have put tremendous upward pressure on home prices over the past year.

That’s the short version. Now let’s take a closer look at why home prices are rising so fast these days — and when they might slow down.

Why Are Home Prices Rising So Fast in 2021?

Many interrelated factors have contributed to the rapid rise of house values in the U.S. But it mostly comes down to three things:

1. Supply and Demand Imbalance

We probably don’t need to tell you that there’s an ongoing supply shortage within the U.S. real estate market. Countless news stories have covered this subject over the past year or so.

The short version is that there are many more buyers in the market than there are homes listed for sale.

This is arguably the leading reason why home prices are rising so rapidly in 2021. It’s Economics 101. When a lot of people want to purchase a certain item — but there aren’t many of those items to go around — the value of said item increases. This is what we’ve seen within the U.S. housing market for many months now.

In fact, the pandemic actually worsened a pre-existing supply crunch by increasing home-buyer demand. Counterintuitive perhaps, but true!

According to a July 2021 report from the Federal Reserve:

“This analysis indicates that the housing market has tightened primarily because of a surge in demand [from buyers] … New demand has exceeded even pre-pandemic levels of supply, and the gap is too large to be realistically filled by new construction in the short term.”

The pandemic has also fueled a sharp increase in second-home buying. That’s when someone who already owns a house purchases another. This has worsened the imbalance between buyer demand and available housing supply.

This is largely why home prices are rising so fast in 2021. And it’s a subject that has attracted attention at the highest levels of government.

A September 2021 article on the White House blog stated:

“The COVID-19 pandemic shifted families’ preferences for location and type of housing, exacerbating existing supply chain constraints that—for several reasons—have persisted for many years. These pandemic-related changes interacted with the existing housing inventory shortage, resulting in sharp price increases…”

Tight inventory is one of the leading reasons why home prices in the U.S. have risen so quickly over the past year or so. But there are other overlapping factors as well.

2. Fierce Competition Among Home Buyers

The supply shortage mentioned above has forced home buyers in the U.S. to compete fiercely for scant inventory. As we wrote in a recent article, the housing market has been more competitive over the past year than at any other time in recent memory.

Granted, the housing market appears to be cooling a bit as we approach the last two months of the year. But we’re talking about a slight downshift from white-hot to red-hot. Despite a nationwide slowdown in home sales, the market is still highly competitive.

This is another reason why home prices are rising so fast in 2021, despite a global pandemic. Buyers have had to compete for a limited number of homes for sale. That means they’ve had to outbid one another by jacking up their offer amounts.

Which brings us to point #3…

3. Aggressive Purchase Offers

Over the past 14 months or so, we’ve seen a steady increase in the number of purchase offers above asking price. This occurs when a home buyer offers more money for a house than the seller is asking. This kind of thing is common in a competitive seller’s market, where bidding wars become the order of the day.

Bigger and bigger offers cause home prices to rise more quickly. Here again, it’s a supply and demand story. All of these factors overlap. They’re all connected, creating a kind of loop. Tight inventory increases competition among buyers, which in turn produces higher offer amounts. And so it goes.

Will Things Cool Down in 2022?

So that’s why home prices in the U.S. are rising so quickly in 2021. But what about next year? Will prices continue to skyrocket in 2022, as they have over the past 12 – 15 months?

While no one can predict future housing market trends with absolute certainty, the general consensus among industry watchers is that home-value appreciation will slow down next year.

As mentioned in a recent housing outlook report published on the Home Buying Institute, several forecasters expect house prices to rise more slowly in 2022 when compared to this year.

And that makes sense. The double-digit gains seen over the past year can’t go on forever. As more and more buyers get priced out of the housing market, demand will start to fall. That would affect all three of the factors outlined above, by cooling the market and slowing home-price growth. Time will tell.