I didn’t think that two year into the pandemic we’d still be seeing crazy bidding wars! It sure seemed as if people would cave in to the fear of the pandemic, may be slow down to see how the health crisis plays out. Contrary to that, the market was frantic! It defied all odds resulting to a near market crash situation (which by the many experts believe that is a possibility).
Still people are crazy abut homes, there are bidding wars everywhere, buyers are competing against well established cash Investors for homes, while some are looking for units in some unfamiliar places. On the other hand, builders are feeling the pressures in demand and cannot find enough materials for everyone who wants a home.
When you look at the median prce for a home in America, you start getting a clear picture of what’s happening. For the last 12 months, the price has been up nearly 20 percent. The for sale inventory is at a new low. Many would be buyers are left on the sideline hoping for a miracle to happen and while so doing, they have also directly driven up the rents instead.
All the markets seem chaotic at the moment and all of this seems unsustainable- a tight market, wild home price growth and dwindling affordability.
And the bad news is that no reprieve is coming, at least not anytime soon. It seems that home prices will kkeep on rising as people who have waited long enough for prices to come down are jumping into the market due to fear of missing out on good prices now!
According to Jenny Schuetz, a researcher at Brookings Institution, the current situation we are seeing right now is far from being a bubble. It’s all about market fundamentals. “It really is about supply and demand — not enough houses, and huge numbers of people wanting homes.”
a report from the National Association of Realtors now confirm that more than 6 million existing homes sold in 2021, this is the highest number of units sold In that category since 2006. and while that was a significant number, it was well short of satisfying the available demand. What’s worrying is the fact that the nation is still relaxed in its efforts to correct this imbalance between supply and demand.
“My pessimistic view is that the economy is perfectly capable of running with unaffordable housing,” said Daryl Fairweather, the chief economist at Redfin.
It makes a lot of sense… if anything, the housing agencies in the country were well aware of the dwindling supply of homes in the last decade, but did nothing. That didn’t stop the economy from growing. That alone was a recipe for the disaster we are seeing right now.
“Another way to phrase that is people will still get up and go to their jobs, even if they’re housing insecure,” Ms. Fairweather said. “That’s one reason to think we’ll still just keep letting this problem get worse.”
earlier last month, Redfin released a report that shows that three out of five homes that went under contract found a buyer within two weeks! This is an all time high and comes at the same time as supply shrank to a new low.
Sellers who got into the market enjoyed the biggest premiums ever seen with the typical home selling for 1.1% above the list price. Last year, at the same time, the typical home sold for 0.3% below the list price.
“Homebuyers are in a frenzy,” said Redfin Deputy Chief Economist Taylor Marr. “Buyers are reacting to changes in mortgage rates but are so far unfazed by the war in Ukraine, stock market volatility and rising oil prices. However, these risks are reaching levels that could be dangerous for the economy, and the Fed is on the cusp of raising rates further to cool inflation. The silver lining for housing is that the spike in mortgage rates has paused for now.”
so, what can be done? For now, more construction is needed. However, it is important to applaud the home building sector as it has been increasing its output for some time now, but since the nation has been underbuilding for so long, it will take some time to remedy the situation.
Still, there are chances that many buyers will give up and get fed up with the soaring prices. That may be true for the local, but many new buyers coming from other places where prices are much higher see the local listing prices as reasonable, which upsets the balance.
Buyers today have a lot of competition sources to grapple with. For instance, first timers have to compete against global capital, all cash iBuyers, institutional investors renting single family homes, small scale investors looking for Airbnbs… its crazy!
“It’s really hard for an owner-occupier to compete with the amount of money that’s flowing into this region,” said Dan Immergluck, a professor at Georgia State in Atlanta.
It is also important to recognize the fact the the pandemic did a lot of reshuffling to the market where people didn’t have to go to work, but worked remotely. At some point, may be in the mid term, this geographical reshuffling of the workers will cool down, this might calm prices down in some places. But, investors are not going anywhere and neither is the technology that enables faster transactions.
Going into the year, the rising mortgage rates should help slow the prices down. And while that may be good news, rising interest rates will not in any way affect the all cash buyers. In fact, higher rates will make owning a home much less affordable.
Who stands to loose? First time buyers who will find it extremely difficult to get a home. And in the meantime, they will be forced to pay higher home rents which cripples their ability to save for a down payment. The working class families that were on the closing in on homeownership before the pandemic will now need at least five to ten years just to play catch-up.
“As a housing economist, it’s kind of depressing to think that there may not be an undoing of the hardships that have been brought upon young households trying to get their foot in the door of the housing market during the pandemic,” Ralph McLaughlin, the chief economist at Kukun, a company that tracks real estate investment activity.
Unsurprisingly, the ravaging effects of hardships in the housing market are remarkably widespread. The last time such as home price growth occurred was during the precursor years of the financial crash of 2008. but even then, during the height of the bubble, only about 40% of the metros experienced greater than 10 percent annual home price growth. In the last 12 months, 80 percent of the metros have seen such spikes. A quarter of all metros have had price increases of more than 20 percent.
Note whatever happens in the single-family market has a direct impact on the rental market too. Since prices have risen significantly in most metros, this has affected the rental market quite significantly. In 2021, many communities in the country experienced a double-digit rent growth. The good news however is that, whatever is happening to the markets right now is not rooted to the risky borrowing that inflated the housing bubble in 2006-08. what are seeing now is a market flush with capable buyers who had a chance to save more money during the pandemic lockdowns. Many have strong credits and are using conventional loans, if at all they are taking any loans. The rental market on the other hand is flush with households that experienced a rise in higher incomes too.
Finally, it is important to call out the local governments who have stymied new housing supply with the zoning and building restrictions. This will remain a problem even when the demand – supply chain is at equilibrium.
Sources;
https://www.redfin.com/news/housing-market-update-homebuying-spike/
https://www.nytimes.com/2022/01/20/upshot/home-prices-surging.html
