What Are The Factors Increasing Home Values?

What Are The Factors Increasing Home Values?

Since the onset of the pandemic, the U.S. housing market has been sizzling. Record-low interest rates created an unprecedented demand for housing, which only worsened a housing shortage that began before the pandemic. Home prices have been rising rapidly as the median home list prices are up 24% since the start of the pandemic, climbing from $310,000 in February 2020 to $385,000 in June 2021.

These home price increases have been supported by numerous factors and understanding the market basics can help you stay on top of these changes.

Millennials Are Entering the Housing Market

The millennial generation, born between 1981 and 1996, is the largest generational group with an estimated 72.1 million individuals. Millennials have finally reached an age where they are able to purchase real estate — leading to the recent surge in residential home buying activity.

According to a recent National Association of Realtors report, they make up the fastest-growing segment of buyers today, particularly those in their late 20s to early 30s. The millennial homeownership rate has increased to 47.9% from 40% three years earlier, and 30% of millennials said in a recent survey that the pandemic pushed them to house-hunting earlier than planned.

People Need More Space

While people were stuck indoors amid shutdowns and social distancing requirements, many had more time to think about what they wanted from their home — more space.

A Redfin survey revealed that the pandemic’s biggest impact on buyers was the desire for more room, with 21% of respondents saying they want a designated area to work from home and the same share wanting more outdoor space for recreational activities. Sales were up nationwide for large homes 21.2% year-over-year in July 2020, compared with 10% for medium-sized homes, and 2.3% for small homes.

Major metro areas also experienced a net decrease in the flow of people into the city, while the suburbs and smaller cities saw an increase. While this migration out of major metropolitan areas may have already been apparent, the pandemic accelerated this trend. These migration patterns have the ability to affect housing prices, tax revenue, job opportunities, and more.

Limited Supply of Housing

A housing supply deficit of 3.8 million units has also inadvertently contributed to a nationwide rise in home prices. In a normal housing market, there’s usually a six-month supply of housing; however, houses have been selling more quickly than ever before and bottlenecked supply chains and shutdowns have slowed new home construction.

Nationwide, builders are experiencing shortages of materials, from lumber to appliances and windows, and are also having difficulty finding enough workers to meet the demand for new homes. According to the U.S. Chamber of Commerce Commercial Construction Index, 72% of contractors are experiencing some delays and 68% expect these delays to continue for three months. While home construction has ramped up in recent months, builders continue to struggle to keep up with demands.


Mortgage investors like Fannie Mae and Freddie Mac buy mortgages to provide fresh liquidity for the market, allowing lenders to make additional loans. Relaxing liquidity requirements on banks and increasing the amount of leverage they can hold allows lenders to take on a higher share of loans.

Freddie Mac and Fannie Mae provided greater liquidity to mortgage markets by temporarily purchasing loans from lenders where the borrower had requested forbearance or had been approved for forbearance due to the pandemic. Historically low interest rates combined with loosening lending standards pushed real estate prices to record highs across most of the United States.

Ability to Save for a Down Payment

While many Americans lost jobs or wages during the pandemic, some home buyers were given the chance to save for a down payment. City lockdowns and fears of an economic downturn slowed down consumer spending and prompted more Americans to build up savings. Add in stimulus checks, advanced child tax credit payments, student loan deferrals, unemployment insurance relief, and the Paycheck Protection Program, and now homeownership is within reach.

A. Lee Smith, a research and policy advisor in the Economic Research Department of the Federal Reserve Bank of Kansas City, analyzed savings rates in the United States in a December 2020 economic bulletin. According to Smith, for every $100 of disposable income, consumers saved $7 in December. By April, consumers were saving almost $34 of every $100 of disposable income. Now, the savings rate is nearly twice as high as it was prior to the pandemic and higher than its peak in any recent recession.

Migration to Low-Tax States

Some lower-tax states saw big gains in the 2020 census. According to the 2020 Census, 331.4 million people now live in the U.S. The 7.4% population increase from 2010 was mostly due to population growth in the South and West, where the growth rates were 10.2% and 9.2%, respectively. The Northeast experienced 4.1% growth and the Midwest had a 3.1% growth rate.

According to a Redfin report, in states with the lowest taxes, an average of four people moved in from other parts of the country for everyone who left over the last eight years. One in five homebuyers cites lower taxes as a reason for their decision to move to a different area.

Californians pay the highest tax rate in America at 13.3% and California is also leading the nation in people leaving the state. According to Evan White of the UC Berkley Policy Lab, 267,000 people left California in the fourth quarter of 2020 for homes in Texas, Arizona, Nevada, Oregon, Washington, and other western states that offer housing at one-fourth of the price.

Institutionalization of Single-Family Rental Market

Large, institutional investors have typically looked at core properties (office, retail, industrial, multi-family) for their investments. As more money has been put into these types of properties, purchase prices went up while returns decreased. This decrease has led investors to invest in alternative assets such as single-family rental units.

Within the past two years, institutional investors have purchased almost 100,000 homes and this number is only expected to increase. These home purchases by institutional investors have only tightened the housing supply even further.

Single-family rentals are also expected to outpace multi-family units over the next couple of years in terms of rent, revenue, and net operating income (NOI) growth. Even during the height of the pandemic, stay-at-home orders did not have an effect on the demand for single-family

house rentals, according to real estate investment trust (REIT) executives in a first-quarter earnings call. Some of the largest home-leasing companies continue to have strong occupancy and rent collection.

While the reason for home price increases is complex, these are some of the higher-level factors that have contributed to recent price gains nationwide. Home price growth is expected to be moderate going into 2022, with full-year house price growth of 12.1% in 2021, followed by 5.3% in 2022.

Full disclosure. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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