If you’ve been looking to buy or sell a house recently, you know exactly how crazy the market is. Incredibly low interest rates coupled with low inventory have led to a frenzy the likes of which we’ve never seen. Let’s talk about ‘why’.
Massive Cost Increases
Home prices have skyrocketed in the last couple of years, but how much of an increase are we talking about? An article written by Richard McGahey for forbes.com explains, “Housing price pressures are found across the country. According to the Case-Shiller index, single family home prices rose nationally by 13.2% in the year ending March 2021. That’s for the entire country, from Omaha to Miami, not just specific hot urban markets. Metropolitan markets show the same pattern in the Case-Shiller data—a 12.3% gain in the New York metro (slowing prices in Manhattan were offset by rising suburban prices), 13.4% in Los Angeles, and even 12.3% in Detroit. The hottest markets? Seattle, up 18.3%; San Diego, up 19.1%; and leading the nation’s metros, Phoenix with a 20% annual increase.”
There are three major causes of the massive spike in home prices. The first being incredible interested rates on mortgage loans. With rates under 3.5%, homes have become more expensive because buyers can qualify for higher loan amounts. It’s a simple case of cause and effect.
The second major cause of the spike in home prices is lack of inventory. In fact, the words ‘historic lows’ have been used to describe the number of homes available. In the last decade, America hasn’t built enough new homes to keep up with population increases. This has resulted in a massive lack of inventory around the country. With so many new buyers entering the market, everyone is competing for the same few houses. The National Association of Realtors announced that the number of homes available for purchase is more than 28% fewer than last year.
The last reason there’s such low inventory on the market, is that sellers are reluctant to leave their homes. Because the market is so crazy, they’re worried they won’t be able to find anywhere else to go. People are holding on to their homes in an attempt to wait out the chaos which is (unintentionally) exacerbating the problem.
Eventually, the strain on supply chains and lack of inventory will ease. However, there are a couple bigger problems looming. First, there are no plans to build an abundance of new housing. Certainly anything being built now will only slightly ease the housing frenzy. The second problem you can expect involves pricing. While construction costs may go down, it is unlikely that home prices will. Potential buyers do have one thing they can look forward to. Drastic increases in prices will eventually slow down. In the meantime, just keep adding money to your savings.
The housing market is an absolute circus right now. If you’re in the process of buying or selling a home, good luck!