Why the Housing Market is so Hot Right Now
housing market
Simply put, the housing market right now is bonkers. With a lack of supply to meet demand, home prices have skyrocketed.
But if that’s the case, why are so many people clamoring to purchase a home right now?
Even if the listing prices of homes take your breath away, there’s an incentive for buyers; interest rates are at some of their lowest points, meaning you can still have a manageable mortgage.
Why So Many People Are Moving
With the recent Covid-19 pandemic affecting people worldwide, lifestyles have changed significantly.
More people are working from home, and they’ve realized they just need different living arrangements in order to have office spaces separate from living spaces.
Additionally, many apartment dwellers find themselves wanting more yard space for their kids, and the pandemic pets they adopted.
What Affects Home Prices?
Everything becomes more valuable when there’s scarcity. Not only are existing homes more expensive due to demand, but raw material prices have skyrocketed as well.
Additionally, land is more valuable since so many people want it.
In March 2021, homes cost 13.2% more than they would have in March 2020.
This applies not just to turn-key, move-in-ready homes, but fixer-uppers as well. And with inventory decreasing by 300,000 homes between April 2020 and April 2021, prices just keep going up.
Investors
Another struggle potential homebuyers are experiencing is competing with investors, or house-flippers, for available homes.
When an investor can offer cash, over the asking price, it’s almost impossible for a first-time homebuyer to get their offer considered.
Sellers want the most they can get out of their house so they have a chance to afford their next home.
As a result, they’ll take the cash offer without caring whether the house will be lived in, or flipped and resold.
Price of Raw Materials
New builds cost more than ever in 2021. Updates to an existing home, such as siding, new floors, landscaping, and retiling bathrooms, cost more than they used to as well, affecting the resale value of a home when it hits the market.
Then vs Now
- Land value increased 11% in 2021
- Drywall costs increased 22% from January 2021 to April 2021
- Copper is 90% more expensive in 2021 than it was in 2020
- Lumbar prices are up 300% as of May 2021 (compared to May 2020)
Overall, the Producer Price Index reports that material costs have increased 19.4% from August 2020 to August 2021.
Lack of Labor
Although there are plenty of jobs available in construction and related industries, a lack of workers affects home values.
Whether people are unable or unwilling to work, it is creating longer timelines for home builds.
When it takes longer to build a house, it costs more, and those increases are passed on to homebuyers.
Will Home Prices Drop?
The big question on everyone’s mind is whether or not home prices will level out.
We’re already seeing interest rates going up, with about a 0.06% increase the week of October 1, 2021 (compared to the prior week’s rates).
Earlier in 2021, interest rates had consistently stayed below 3% for 30-year fixed home loans.
The Difference Interest Rates Make
To better understand why these low interest rates serve as incentives for homebuyers, let’s describe a hypothetical.
In 2013, a person purchased a home for $155,000. Based on what they were able to put down, and a 4.125% interest rate, their monthly payment has been about $932 for their 1,700 square foot home.
As of 2021, that home has appreciated based on improvements and the demand for houses, putting the estimated value at $480,000.
This means the homeowner could sell their home and potentially have about $353,000 of equity to put toward a new home.
Let’s say this person decides to use all $353,000 of equity as a downpayment on a $550,000 home, with 2,500 square feet, in 2021.
With a 3% interest rate and that much down, the estimated monthly mortgage would only be $1,030.
That’s just $100 more than what they’ve currently been paying, making the more-than-half-a-million-dollar price tag suddenly doable.
Predicted Home Value Trends
Interest rates are proving they’re on trend to level out above 3% in 2021, it’s believed that home values have also peaked.
Depending on where you live, you may start to see home prices increasing only in single digits, rather than in double digits.
While no one is expecting the housing market to crash any time soon, we may begin to see more price reductions in the latter half of 2021 and into 2022.
As buyers see interest rates climb, they have more reason to counter high asking prices with lower offers. It will still be a seller’s market, though, as inventory continually fails to meet buyer demands.
Who’s Buying Homes Right Now?
We’re seeing fewer renters make the move to buy a home and fewer first-time homebuyers in the market.
Without equity from the sale of a current home, it’s more difficult than ever to afford a house.
And since builders can’t afford to produce more affordable homes, inventory will continue to suffer for potential home-buyers who make less than six figures.
Buyers in the South
Home prices are more affordable in different regions of the US, due to factors such as land value, availability of raw materials, and cost of living.
Here’s a breakdown of where people are successfully getting the keys to a new pad:
- 43% of buyers are in the South
- 23% of buyers are in the Midwest
- 21% of buyers are in the West
- 13% of buyers are in the Northeast
If you have the luxury of being able to work from home, it may be time to consider relocating to an area with more affordable and available homes on the market.
Buyers with 3% Down
Even if you’re not lucky enough to live in the South, buyers with a little as 3% down are closing deals on homes in the US.
Gone are the days when you had to have 20% down to even be considered by a lender; buyers are willing to pay higher monthly mortgage payments in exchange for getting approved with smaller down payments.
In short, although it’s a seller’s housing market, now is a good time to buy.
Historically low interest rates mean you’ll spend less on your mortgage in the long run.
Category: Housing
