What a Hot Housing Market Means for Home Prices Ahead

June 7, 2021

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On the hunt for a new home? Depending on where you’re looking, you may have noticed that it’s pretty competitive out there: Open houses causing traffic jams. Bidding wars. Buyers skipping home inspections to get ahead in a cutthroat market.

In short, the US housing market is on fire. The real estate market craze kicked off during the early months of the pandemic in 2020, and has created pretty intense competition for homes in some areas of the country – and frustration for some home buyers. (Whether you’re actively shopping for a home, or you only casually peruse home listings with no intention of buying, watching this market may still bring up a lot of questions!)

Like, is this frenzy here to stay? Our economist friends over in Goldman Sachs Research can help answer that (and more). In a recent report, the team of economists led by Jan Hatzius looked at what’s fueling the red-hot demand and surge in prices, as well as what’s in store for the future. Here are some of the takeaways from their report.

A lot of eager buyers, not so many homes

Why is the housing market on fire? It helps to circle back to the concepts of supply and demand from Econ 101 for some answers. Basically, more people want to buy homes (high demand) than the number of available homes on the market (low supply). As a result, there’s been some stiff competition – yes, those bidding wars are really happening – and home prices are up 12% from last year.

Expect more double-digit increases in home prices this year and next.

Is all of this a temporary phenomenon? For now, it doesn’t look like it. The strong demand for housing doesn’t show signs of letting up, according to Hatzius’ team. The pandemic forced many of us to reconsider our priorities – including where we want to live – and some homebuyers stepped up their housing search, while others went hunting for second homes.

And even before the pandemic, housing demand was strong – and is likely to remain that way for two reasons:

Millennials are now the largest age group in the US, and they’re at a prime home buying stage of life.
There may be some sticker shock at home prices, but mortgage rates are actually quite low. And that’s making housing seem relatively affordable by historical standards

As for the low supply of available homes, that was a problem even before the pandemic began – and there are “no quick fixes” to alleviate the shortage, the economists write. Here’s why:

For several years, homebuilders haven’t been able to find enough skilled workers to build homes. Now that so many more people want to buy homes, there aren’t enough workers to keep up with that demand.
You need a plot of land (no matter how small) to build those homes. But land prices are rising and there’s a scarcity of buildable land.

Where are home prices headed?

Expect more double-digit increases in home prices this year and next. That will probably come as good news or not-so-good news depending on whether you’ll be a future buyer or a seller (or both).

Our colleagues in Goldman Sachs Research think those supply and demand dynamics we mentioned earlier are going to stick around for a while based on some forecasting of future home prices. To do this, they built a model that takes into account things like demographics, supply and demand, the homeowner vacancy rate, housing affordability and credit availability.

Open houses causing traffic jams. Bidding wars. Buyers skipping home inspections to get ahead in a cutthroat market.

Here’s what the model predicted could happen: All of those above issues with a lack of supply of available homes and high demand are likely to persist in the years ahead, and it will take time before some people are priced out of buying a home. Eventually, however, the supply of homes should bounce back and reduce some of the pricing pressures. That’s not to say housing prices will go down – they just may not go up by double-digit growth rates each year, which could help those of us who are a few years away from buying.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.