Commentary Directory

Home Prices Fly in 2021

Jacob Hess
February 22, 2022

The S&P Global Case-Shiller National Home Price Index reported a 18.8% YoY gain in December which was the same as was reported in November. The levelling off in the annual gain came after the index decelerated in the 2nd half of 2021 from a record high pace recorded in July. The 10-City and 20-City composite indexes both saw monthly gains over 1% and acceleration in their annual gains (up to 17.0% YoY and 18.6% YoY respectively). In the end, these gains make for the strongest calendar year price growth on record.

The FHFA also reported strong price growth of 17.5% YoY in November after a monthly gain of 1.1%. While the monthly gain was well above the average gains seen in the last 20 years, it was a deceleration from earlier in 2021. FHFA senior economist Will Doerner suggested that "the data indicate a pivot." In reality, housing demand is likely not receding, but rather potential homebuyers are becoming more hesitant to accept rising prices. Regardless, all nine census divisions in the US saw price growth above 13% YoY and above 1% MoM in November.


The past two years have been wild for the real estate market with a combination of supportive fiscal and monetary policies and an unprecedented public health situation. Low rates and some extra cash convinced homebuyers to move forward with purchases in late 2020, and many others took advantage of new remote jobs to relocate to more desirable locations. Existing home sales jumped to 5.64 million in 2020 and to 6.12 million in 2021. The surge in demand was met with a squeeze in supply as H2 2021 brought about shortages in building materials that pushed prices higher. As a result, inventories dropped to record low levels, 880,000 at the end of 2021.

Here we are in the real estate market in 2022, and suddenly it feels like there are many reasons for house price growth to struggle. Inflation is almost certainly going to cause a sharp Fed tightening cycle. Home prices are at record highs, and the anticipation of supply chains reconnecting could shade inventory expectations more optimistic. How many homebuyers that would have bought in 2022 made a decision to buy in 2020-2021? These questions suggest deflationary answers, but it almost certainly won't lead to a decrease in home prices in 2022, rather just a slower pace of growth.

We'll be keeping a close eye on the Case-Shiller indexes and the FHFA reports this year, especially in Q2 when interest rate expectations start to shape up as the Fed begins guiding its intentions on rate hikes for the rest of the year. The price of credit will be the main driver of demand. On the supply side, inventory should start to recover once materials become less scarce. Construction companies will be looking to build and sell at these prices, especially given the right conditions.