Depending on your vantage, 2021 was either one of the strongest or one of the most challenging housing markets in a generation. Across a range of government and private measures, house prices have posted their largest year-over-year increases, rising to record-shattering highs. In nominal terms, prices have catapulted past their 2006 peak, and are 10% to 15% higher after adjusting for inflation. In turn, housing opportunity has declined to its lowest point in at least a decade as measured by the National Association of Homebuilders and Wells Fargo, moving homeownership further beyond the grasp of many American families.

Amid the vagaries of a supply-constrained market buffeted repeatedly by the pandemic, October’s S&P CoreLogic Case-Shiller Index was 19.1% higher than a year earlier, off only slightly from its peak in August. For the same period, the Federal Housing Finance Agency (FHFA) House Price Index increased 17.4%. While the month-to-month pace of appreciation has been slowing, it remains nearly double the long-term average and is easily outpacing private sector wage gains.

The established coastal markets, including the Bay Area, Manhattan and Brooklyn, Los Angeles, Boston, and Seattle, remain the most expensive in markets in the country. However, the locales with the biggest price increases reflect a shift in regional momentum, with demographics and migration among the primary drivers. The rankings of hot housing markets are dominated by the Sunbelt, with Phoenix, Las Vegas, and South Florida featuring regularly. Unsurprisingly, the South has also seen the largest deterioration in affordability.

Winners and Losers

For homeowners and sellers in an overwhelming majority of markets and submarkets, unprecedented price appreciation has translated into substantial gains in equity and proceeds, respectively. Whether a hold or a sell, both groups reaped the benefits in 2021. Supported by 30-year financing rates that remained below 3.0% for 31 of the year’s 52 weeks (see Freddie Mac’s Primary Mortgage Market Survey), refinancing volume climbed to $1.6 trillion over the first two quarters. While activity likely slowed in the second half of 2021, the resulting average annual mortgage payment savings through June was over $2,800, with the largest upside in high-cost markets including Washington, DC, New York, San Francisco, Los Angeles, and Seattle.

On the other side of the transaction, the housing scarcity contributing to price appreciation has dashed the hopes of many would-be buyers. A proxy for demand, the National Association of Homebuilders (NAHB) reported new record highs for the traffic of prospective buyers in each of the first seven months of 2021. While the bidding wars have subsided somewhat, prospective homeowners still encounter significant competition from a diverse set of market participants, ranging from traditional homebuyers relying on mortgages to all-cash buyers and institutional investors. Data provided by Redfin show national average sale-to-list ratios are holding above 1.0 after easing off a summertime peak.

Nearly two-thirds of respondents to Fannie Mae’s Home Purchase Sentiment Index believe it is a bad time to buy, a slight improvement from the record level of pessimism coinciding with Redfin’s gauge of the market. Even so, 69% of respondents would buy rather than rent if they moved, holding relatively steady even as their read of buying conditions has weakened. The experience of fast-rising apartment rents and a nearly 40-year low in rental availability is likely a behavioral factor in sustaining the reported preference for ownership.

Disparities in Housing Opportunity and Security

Beyond the averages, the last year has also reinforced disparities in housing opportunity and security and brought new research to bear in our understanding of its mechanisms. Access to technology and the digital divide will exacerbate these differences as Millennials grow as a share of homebuyers, with the best equipped leveraging a rich set of online tools in minimizing search costs for both houses and mortgages.

The Census’ Household Pulse Survey, a critical new experimental tool for measurement of the pandemic’s impact on households, shows wide gaps in housing security. For the period spanning December 1 to 13, 6.9% of all home-owning respondents were not current on their mortgage payments. As a point of comparison, albeit an apple to an orange in terms of methodology, CoreLogic’s most recent mortgage performance reporting shows 3.9% of home mortgages were delinquent in September, on par with pre-pandemic levels. The disparities emerge when breaking down the Pulse numbers: for households without children, the “behind on mortgage payments” rate was 5.6% in early December, and 8.6% for families with children. For households with incomes over $200,000, the rate was 2.3%, but increased linearly with lower incomes, up to 18.0% for the lowest income bracket. For White households, the rate was 4.7%; for Hispanic or Latinx households, 10.1%; and, for Black households, 15.5%. As this particular survey instrument was introduced in response to the pandemic, we cannot observe pre-pandemic levels for comparison.

Amongst single female heads of households (SFHOH) surveyed earlier in the year, Freddie Mac found that 57% of Black and Hispanic renters are cost-burdened, defined as “not having enough to cover the basics of living payday to payday.” Constrained in their ability to save towards a down payment and confronted with sharp increases in house prices, 60% of SFHOH renters across all races believe homeownership is permanently out of reach. In a separate report, Freddie Mac finds significant gaps in appraisals—the share of properties or applicants receiving appraisals below contract price—when comparing across predominantly minority and White census tracts. Essential to the validity of the findings, the differences cannot be explained through comparable sales analysis or a scenario where minority buyers systematically overpay for their homes.

Price Increases Lose Their Momentum, But It Won’t Get Easier for Buyers

Many of the underlying conditions driving house prices in 2021 remain intact in 2022. Modeling a wide range of scenarios for the macroeconomic environment, Chandan Economics’ baseline housing forecast shows price appreciation slowing, but still outpacing household income growth. For first-time and income-constrained buyers, affordability will deteriorate further this year, even as supply constraints begin to ease.

Competing contributors to the forecast include a sorely needed improvement in deliveries of new homes, drags on that pipeline from scarcity of skilled labor and land, measured increases in mortgage rates, and higher sales volume, particularly for new homes. Where traditional demand may soften somewhat, it will be offset by increased competition from alternative and institutional capital sources, including investors repurposing single-family homes for the rental market and localized increases in “ibuying” activity. Among the developments that could upend the forecast: the potential for markedly higher inflation and the policy response it would motivate, supply chain bottlenecks, and serious setbacks in the resolution of the pandemic as might arise from variants with higher morbidity and mortality.

Chandan’s forecast generally comports with consensus projections, which show price increases losing momentum in the coming year, albeit with significant disagreement regarding the magnitude of the slowdown. Near the middle of the forecast range, Freddie Mac’s October projections show appreciation of 7% in 2022, down from 16.9% for 2021. Fannie Mae’s December housing forecast anticipates a 7.4% increase in the FHFA Purchase-Only Index. The mean of Pulsenomics’ third quarter panel forecast shows the Zillow Home Value Index rising by just under 6% in 2022, with individual forecasts ranging from an increase of 15% to an outright decline of 9%.

Comparisons to the previous cycle’s housing boom and bust are to be expected given the heady pace of appreciation. But from the policymaking perch, and absent an exogenous shock to the economy, a correction in house prices that might imperil financial and household stability is a far outlier scenario. The more vexing issue is the supranormal rate of appreciation that will fuel a further erosion of housing affordability, and which could prompt well-intentioned but ultimately unsound and counterproductive policy interventions by local and federal government.