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Rising Rates and Prices Won't Doom the U.S. Housing Market

But more-affordable homes will be needed to realize millennials' ownership potential.

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The housing market has been a bright spot for the U.S. economy during the pandemic, as demand for new and existing homes reached levels last seen during the mid-2000s housing boom. More time spent at home and more workplace flexibility have caused many households to re-evaluate their living situations, which has spurred demand for larger suburban homes. Record-low mortgage rates in 2020 and elevated personal savings from lower discretionary spending during the pandemic and government stimulus have facilitated more home purchases, while a limited supply of existing homes for sale has made new construction an attractive option for prospective buyers.

However, a supply/demand imbalance has caused home-price appreciation to far outpace wage growth, mortgage rates are back on the rise, and construction costs are higher, especially for lumber, which haven’t helped affordability. Even so, mortgage rates are still historically low, we expect high lumber prices to moderate, and homebuilders continue to increase production of entry-level homes that take less time to build and are more affordable. While affluent buyers were very active in 2020, more-affordable homes will be needed to realize the millennial generation’s homeownership potential.

Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.