Remember when you could look at a couple homes over the course of a week or two and make a decision? That isn’t the case anymore. If you have been in the market to buy or sell your home this summer, you know homes are selling as quickly as they are listed. There’s nothing more defeating then writing countless offers just to get beat out. Clients ask all the time, when do you think this market is going to settle down? It’s a hard question to answer because we have never seen a market like this. The obvious answer is things will slow down a bit when we start to see an increase in interest rates. Buyers are taking advantage of the record low interest rates and I don’t blame them! It could be a long time before we see interest rates this low again. But that isn’t the only thing driving this sellers’ market, the home inventory is also at an all time low.

Initially when real estate opened back up again after the COVID shutdown, the thought process was sellers are afraid to sell during a time that was economically not stable. People worried about the risks of selling their home and buying a new home when things like their job could be in jeopardy. Therefore, there was a limited number of homes for sale, but lots of buyers driving the prices sky high. Now here we are a year later still battling the same inventory problem. At this point I had to ask myself is COVID really causing the housing shortage or did COVID just put a spotlight on the overarching issue?

Leading up to the housing bubble in 2008, builders overbuilt homes. According to Lawrence Yun, an NAR chief economist, the U.S had 2.1 million home surplus in 2006. Following the crash of 2008, underproduction steadily chipped away until inventory was normalized in 2011. Instead of maintaining inventory, builders continued to underproduce new homes which is what ultimately lead to the housing shortage today. By 2015 the shortfall was 2 million homes and by 2020 it was 4.8 million homes.

This lack of inventory is the #1 driver behind the current market. It is also why home prices are not in danger of falling dramatically anytime soon. Unlike 2008, this housing cycle is fundamentally different and we don’t have risky mortgages overstretching buyers’ budgets. Until builders can build new homes to meet demand, home values will continue to increase. According to Yun, the national median home price is expected to increase 9% this year and another 3% in 2022. It could be years until inventory is normalized again.

The NAR published a study called “Housing is Critical Infrastructure” showing that the U.S needs to build 2 million units per year for the next decade in order to adequately provide for our growing population. This is a 60% higher production pace than in 2020. So good news for buyers right now is that the current elevated home value is still expected to increase over the next couple years. That can provide some relief to homebuyers who are worried that the market will crash as it did in 2008.

Back to the original question of when do you think this is going to settle down? Unfortunately, it won’t be anytime soon. We will continue to see the fluctuation with the seasons, but until we can increase our inventory, home prices will continue to rise. So moral of the story, if you find a home you love don’t wait because someone else will scoop it up.

Sources:

‘If You Build It’ by Daniel Bortz (Realtor magazine July-August 2021)

‘Summer of the Speed Buyer’ by Lawrence Yun (Realtor magazine July-August 2021)