Why is the housing market so hot? 4 answers for home buyers
After a frenzied boom and exhausting slump, the housing market had apparently reclaimed its place as a dramatic weak corner of the US economy. Then came the coronavirus pandemic, and the housing got hot again – really hot.
The median price of homes sold by realtors climbed 17% from March 2020 to March 2021 – a new record, according to the National Association of Realtors. The rapid ramp-up raises an obvious question: why are house prices rising so rapidly?
Here are four fundamental factors that drive values up.
1. There is very little existing housing.
The coronavirus pandemic struck just as the spring 2020 sales season was about to kick off. Homeowners hit the pause button, creating a continuing shortage of existing homes.
Now, there is only a 2.1-month supply of existing homes for sale, according to NAR. That’s a minimal amount, up only slightly from February’s record low of 2.0 months of supply.
Such a tight supply creates its own self-perpetuating cycle: Homeowners who thought they were selling realize that it will be difficult to find a home to move into, so they decide not to sell.
“Real estate is an unusual industry,” says Brian Smith of Union Home Mortgage. “The inventory is based on the fact that a person wakes up one day and says, ‘I want to sell my house.’
In today’s market, homeowners are not making this decision. And with few homes for sale, the properties that are on the market are the subject of bidding wars. Many are selling for more than the asking price.
2. There is not enough new construction to take over.
When the 2005-07 bubble burst, builders stopped building – and they didn’t pick up anything close to their pre-crash pace. Housing starts have been muted for years.
“Housing starts are still 23% below January 2006 levels, leaving the US real estate market 3.8 million single-family homes below what is needed to meet demand,” says Todd Abraham, senior portfolio manager at Federated Hermes investment bank.
Builders can’t just start the home building machine – they have to buy land and then get regulatory approvals, which is a time consuming process.
3. Demographic trends are driving demand.
The millennial generation of 62 million Americans is in prime time for household formation. Unlike Gen X, who number 55 million, Gen Y is a larger age cohort.
Meanwhile, the current real estate boom is accompanied by an explosion of Hispanic buyers. This group is expected to become a major force in home buying in the years to come.
4. Mortgage rates remain near record lows.
While mortgage rates are no longer at all-time highs, they remain historically cheap. The average cost of a 30-year fixed-rate mortgage fell to 3.16% this week from 3.20% last week, according to Bankrate’s national survey of lenders. The 15-year fixed rate mortgage remained at 2.47%.
These rates are really low – they increase the purchasing power of consumers, allowing them to drive up prices.