A year ago, we were told there would be “two weeks” of lockdown to contain a rapidly-spreading virus. And two became three, then four, and, well … the rest is history.
The timing for real estate was like halting a roller coaster at the top of its peak: Spring Market. The height of the busiest season in real estate was getting ready to roll and the lockdowns left buyers, sellers, and real estate professionals hanging in limbo, waiting to see what their next move should be.
And for many of us who were around then, the PTSD of the 2008 market crash was making us all itch.
Turns out, the housing market outperformed any other year in history with home prices reaching an all-time historical high: $370,000 in March 2021, a whopping 15.6% increase over last year.
As with any dramatic pendulum swing, new challenges are unveiled and questions arise. Here, we will break down the most common ones.
HOW HIGH WILL PRICES GO?
This is the question. In order to answer it, we need to pay close attention to supply and demand, especially as it relates to affordability.
Affordability is Healthy: Nationally, 55% of households can afford a median priced home (C.A.R. Traditional Housing Affordability index). The danger zone for affordability is below 20%, so despite the record level pricing, we have a healthy affordability thanks to low interest rates.
Supply & Demand: Economics 101 taught us that the tighter the supply and greater the demand, the higher prices climb. The following chart illustrates the shocking reality of just how low our national inventory levels are—less than half the levels of last year and nearly 1/3 of the levels in 2016:
Hence, prices skyrocketed. How much longer this can continue is also directly related to the supply chain of new housing.
There are two ways to solve an available housing shortage: build more homes or list more homes.
Can we build our way out of this? Many will argue that homes can’t be built fast enough to have any kind of short-term impact on our supply problem. For those on the brink of
market later this year, the cost of lumber is putting a wrench in many builders’ construction plans.
Why does lumber cost so much now? Due to a misread of the lumber market, many lumber dealers and mill operators panicked when COVID-19 hit and pulled back on production. Additionally, due to COVID restrictions, mills cannot operate at a full capacity in order to produce lumber. Couple that with the remodel boom brought on by the lockdowns, and we have a supply and demand crisis going on in materials—a whopping 188% increase in the costs of lumber since the beginning of the pandemic.
So what about listing more homes? The biggest reason why we aren’t seeing more homes emerge on the market is because sellers have nowhere to go due to the high costs of housing.
Ironically, the very reason they are motivated to sell (high home value) is the same reason they don’t. They fail to see how they’d be better off selling and trading up.
Many homeowners are also enjoying beautiful fixed rate mortgages, which means that as rates rise, they will need to trade in those 2-pointers for higher ones, and that could also lead to many homeowners staying put.