What’s Next for the Red Hot Housing Market
Dear Rich Lifer,
Everywhere we look there are signs the housing market is on fire.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in cities across the country, rose 13.2% in the year that ended in March.
That is the highest annual rate of growth since December 2005!
At the same time, the Commerce Department reported that the median price of a new home in April was $372,400, up 20.1% from a year earlier, the strongest annual gain since 1988.
These record-breaking prices are making it difficult for Americans to afford homes. According to the National Association of Home Builders, 60% of households can’t afford a median-priced new home.
Meanwhile, the inventory of available housing continues to fall, which is a main reason why the prices of homes continue to increase. In fact, at the end of April, the inventory of unsold homes stood at just 1.16 million, down 20.5% from April last year.
Demand for housing is also being driven by ultralow mortgage interest rates, which have declined over the past 40 years. The current average rate on a 30-year fixed mortgage is around 3%.
Today, we will take a look at expert predictions about the future of the market and go over some tips for navigating the current climate if you are attempting to purchase a home.
What’s Next for the Housing Market
There are some early signs that existing home sales are beginning to ease. Sales fell 2.7% in April from March to a seasonally adjusted annual rate of 5.85 million, according to the National Association of Realtors (NAR), marking the third month-to-month decline.
However, economists continue to expect the supply-demand imbalance to continue, which will drive prices up even further.
Bill McBride, an economics writer who famously predicted the 2007 housing crash, recently commented, “In my time studying housing markets, I’ve seen bubbles and I’ve seen busts. But I’ve never seen anything quite like this. It’s a perfect storm.”
The most important factors in the state of the housing market are supply and demand. McBride explains that “demand will be high for a while, because Millennials need houses. Prices will keep rising for a while, because inventory is so low.”
Millennials are the driving, generational force behind the ongoing surge in demand for homes. Most millennials have been financially unable to get into the housing market, but now, ultralow interest rates and record-breaking savings accounts are allowing them to storm the market.
At the same time, we are witnessing years of inadequate building, a pause in construction due to the pandemic, seniors who are now choosing to “age in place” rather than sell their homes, and pricing spikes for building materials like lumber. When you look at the factors altogether, there should be no surprise that inventory is so low.
McBride advises that if you want to know where the housing market is heading, the most important thing to look at is inventory. He does point out that in the last few weeks, we have seen inventory numbers increase slightly from their rock bottom in April.
However, he notes that at its current pace, the number of houses on the market nationwide won’t reach normal levels for about 14 months.
Looking forward, he predicts, “I think when you put everything together, the odds are that things get more normal in a year.”
If you really are set on buying a house this year, there are some steps you can take to make yourself a competitive buyer…
Navigating the Current Market
Homes are flying off the market, and in this ultra-competitive climate, potential buyers are taking even more dramatic steps to snag a home.
Daryl Fairweather, the chief economist for the Redfin online brokerage, noted that houses are selling at record paces. According to the NAR, an average home for sale in April spent only 17 days on the market, the quickest pace on record in the past decade.
There are traditional tips that can help you increase your odds of locking down a place — like getting preapproved for a mortgage — but now, people are going above and beyond to stand out to sellers.
Some buyers are offering tens of thousands of dollars above the asking price (often in cash), allowing the seller to live (for free) in the home after closing, or waiving inspections.
Real estate professionals note that waiving certain contingencies like inspections have been common in specific markets like Seattle, but now, this is becoming a norm across the country.
Another practice that has become common is sending “Dear Seller” letters along with an offer. Such letters allow the buyers to introduce themselves, compliment the house, and attempt to make a personal connection.
Some agents encourage such letters, saying they can help the buyer stand out. Others warn that ultra-personal notes can reveal details about the buyer’s race, religion or family status, which could result in sellers accidentally getting tangled in fair-housing laws.
For example, if a buyer mentions how great Christmas gathers will be in the cozy living space, and the seller, for whatever reason, rejects the offer, the buyer could say they were victims of religious bias.
Maura Neill, an agent with Re/Max Around Atlanta, also advises sellers to be ready to be patient or be willing to move incredibly fast. It seems like conflicting advice, but if buyers aren’t ready to move fast on a potential property, it will be swept up within days.
Angelica Olmsted, an agent in Denver, noted that tight markets demanded creative thinking. Buyers are offering all kinds of wild incentives to get sellers to seal the deal. In Nashville, a realtor recounted how a buyer offered to pay for a bounce house for the seller’s child. In another instance, he said a buyer promised a VIP meet-and-greet with an unnamed celebrity musician.
If you’re not willing to wait the expected year for the markets to settle, you may have to start thinking outside the box when it comes to securing your dream home.
To a richer life,
The Rich Life Roadmap Team