Housing: The 2021 Asset of the Year

Housing should be on the cover of TIME Magazine as "Asset of the Year" for 2021.

The net worth of the average US homeowner increased by about $80,000 dollars in the past year, just from the increased value of their home. That's a bonus equal to almost 120% of the median household income and just one more dividend paid by an asset that is already the single largest source of wealth for most Americans.

The 2021 year-end value of all single family and condominium housing in the United States is approximately $38.6 trillion dollars. That's up $7 trillion from December of 2020, bringing the total tappable equity according to data drawn from Black Knight's Collateral Analytics HomePriceTrends daily sales tracking dataset. Black Knight's automated value models (AVMs) calculate the actual values and appreciation of every single-family home and condominium in the United States to create estimates that are highly accurate all the way down to the property and neighborhood level.

The total value of the U.S. stock market is estimated to be slightly larger ($45 trillion), but only 56% of Americans own stocks, while approximately 66% own homes. And home ownership tends to be a lot less risky than stock investing, as illustrated by the recent breathtaking stock market plunge.

Exhibit 1 shows the incredible increase in housing wealth for the past year.

Exhibit 1: US Housing Values by Month in Aggregate since December 2020

​There are lots of reasons why home values rose so much in 2021. Chief among them: low interest rates and a Pandemic-induced shift toward working at home that helped to create enormous housing demand. Soaring demand hit at a time when housing inventories were already low and further depleted by the difficulty of building new homes due to the triple-threat of supply-chain shortages - including labor, materials and appliances - raising prices even higher, especially for larger homes with extra rooms to accommodate families working and learning at home.

The decoupling of workers from central offices touched off a migration away from urban centers toward the suburbs and affordable housing markets that offered more in the way of lifestyle and bigger, or at least comparable accommodations at a much lower cost per square foot.

In a high-priced home market, an increase of $50,000 would barely raise an eyebrow. So when buyers move out of those markets, they don't think twice about paying what might be considered an exorbitant price for a home outside the city - especially when faced with a dwindling supply. That's what we saw in markets like Punta Gorda Fla., Lewiston, Maine, and Yuma Ariz., to name a few.

​Layer in those national trends on top of low taxes, a mild climate, relative affordability, and hipster street credibility, and you end up with a story like Austin, Texas, the hands-down winner if there were a competition for Hot Housing Market of the Year.

Austin may have had the hot hand, but even the least affordable housing markets showed big increases in terms of absolute dollar gains. Exhibit 2 shows the ten markets with the highest aggregate total value gains, broken out by property type.

For perspective: The aggregate increase in home values in Los Angeles, alone, exceeded the 2021 GDPs of some fairly large countries, including: New Zealand, Portugal, Peru, and Greece.

Note that Austin's rocket-powered rise in home values placed in the top ten, alongside the hottest markets on the West Coast, plus Atlanta and Phoenix. Austin's average price has moved up significantly over the past two years from $390,000 to $524,000 for condominiums, an increase of 34.5% and from $525,000 to $756,000 for single family housing, a gain of 44.0%. Such increases in values for only one or two years are historically very rare.

Exhibit 2: Top CBSAs for Total Value Increases by Property Type​

Exhibit 3: Price Trends by Number of Bedrooms for all US CBSAs from 2005 through 2021

For all the positive forces driving home prices upward, scarcity remains at the heart of the story. That has been evident not only across geography but also by home size, as there tend to be fewer larger homes available.

Exhibit 3 shows the median single family sold price by number of bedrooms for the overall U.S. back to 2005.

These same trends, by number of bedrooms, hold true at the market level. As shown in Exhibit 4, homes with more bedrooms tended to have the greatest price appreciation since the Pandemic began.

Exhibit 4: Relative Price Change by Bedroom by CBSA

From an investment perspective, anyone with a mortgage (60% of homeowners) received a leveraged multiple of these annual returns, by virtue of getting 100% of the increased value, divided by a much smaller personal equity investment. This win for homeowners is also a win for the U.S. economy because higher equity makes it less likely that homeowners will default on their loans and home ownership contributes to social stability. Renters, of course, missed out on the home value appreciation bonanza, which would have far exceeded rent payments over the past year.

Conclusions

Unlike supply chain problems which are easier to resolve, it does not look like the supply of new housing will make up for the low available inventory of existing stock for the foreseeable future. Labor shortages, material shortages and appliance shortages continue to hinder the rate of new construction.

Mortgage rates have started moving up in response to both inflationary pressures (i.e., 7% CPI increase in December of 2021) and the announced tapering whereby the Treasury buys less of the mortgage-backed securities that have acted to hold mortgage rates down. While higher mortgage rates make housing less affordable, they do not necessarily drive down home prices. Instead, buyers, faced with higher interest rates, are more likely to look for smaller and lower priced homes, increasing competition and exacerbating shortages.

Owners who have locked in mortgage rates of 2.0% to 3.0% for fixed-rate mortgage (FRM) products over the past two years are generally going to be reluctant to give up these below-inflation-rate loans. This widespread benefit of low rates among current owners reduces the future inventory of new listings and so we do not expect a flood of inventory that would otherwise bring prices down. Home prices may not appreciate at 2021 rates in 2022, but given the tight supply, they are unlikely to fall. So if you're trying to build a nest egg, it still makes sense to invest in a nest.

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