Home prices continued to increase in January, indicating the pandemic housing boom continued into the new year because of the shrinking inventory of homes for sale and low mortgage rates.  

Nationally, home prices in January rose 11.2% from a year earlier, the highest annual gain in nearly 15 years, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. 

Every major metropolitan city experienced a price increase. Phoenix, Seattle and San Diego continued to lead all cities in annual gains, as demand continued for spacious homes in mid-size cities and suburbs. Phoenix continued to report the highest annual price increase at 15.8%. Seattle and San Diego followed with a 14.3% and a 14.2% annual gain respectively. 

Demand for homes in big cities like New York City and Los Angeles has remained high with annual price gains of 11.3% and 10.8% respectively.  

The surge in home prices that began in June are continuing to increase in January because interest rates are still low and housing inventory is still tight. Although the 30-year mortgage rate has increased to 3.17% as of last week, in January it was at a historic low of under 3%. The number of new homes constructed has dropped from its December peak, which means construction is not picking up quickly enough to meet the demand. 

Jim O’Sullivan, Economist at TD Securities, said he expects the price increase to moderate in the next three to four months as mortgage rates rise. He pointed to the weakening of home sales in February as proof. Home sales were down 6.6%  in February, but up 9.1% from a year ago, according to data from the National Association of Realtors.

“The big boost from the drop in mortgage rates, has probably run its course,” said O’Sullivan. “So, I would expect home price numbers to start slowing again fairly soon.”

But while rising mortgage rates may lead to slower price growth, there are still not enough homes for sale to meet the demand. The number of existing homes for sale dropped 1.9% in January, and 25.7% from the previous year, according to the National Association of Realtors. Houses are sold, on average, within 21 days, which is a big decrease from the 43 days it took a year ago.  

Marjie Brady, a realtor in Charlotte, NC, said demand for homes is so strong that some people are putting offers on homes that they haven’t even seen. “I had agents calling me every day wanting to put offers in sight unseen,” said Brady in reference to a house she just sold that had not been formally listed to the public. “They didn’t even care to have their folks look at the house, they wanted to get an offer in.”  

New home construction isn’t keeping up with demand. In December, housing starts were up at a level not seen since 2006, but they fell for the first time in five months in January and again in February. According to the National Association of Home Builders, the rise in lumber costs has slowed building and added more than $24,000 to the price of the average single-family home. 

“Housing starts need to increase dramatically,” said Troy Ludtka, economist at Natixis. “Inventories are low and they’re gonna continue to be low, and that’s gonna pressure prices upward.”

The competitiveness  of the housing market has been good for sellers, but home price appreciation has created an affordability challenge for new homebuyers. 

“As home prices continue to climb, homeownership is completely out of the question for a huge swath of the public,” Ludtka said.

Alex Mazza, 30, is a lawyer who is moving to Oceanside CA, part of the San Diego metropolitan area, next month. He originally wanted to buy a single-family house, but the prices were so high that he plans on purchasing a two-bedroom condo in the $350,000 to $400,000 range instead. 

“These places I look at, in four days they’re no longer on the website,” said Mazza. The demand has left Mazza with no choice but to put in an offer as soon as he attends an open house next month. “It sounds crazy that you do that ever, especially with this much money.”