This is not the first time the United States has experienced a strong sales market. Something that makes it different this time is that the market is extraordinarily strong in all parts of the country. Typically, intense markets are found on the coasts, but this time it’s almost everywhere, with the national average listing price hitting a new high in May 2021 when it hit $ 380,000 (Realtor.com) . This is an increase of 15.2% compared to last year.
How the summer market got so hot
Let’s look at the main drivers of this unprecedented real estate market for the summer of 2021 (it’s a long list):
- Millennials are in their peak home buying years.
- Mortgage rates have been exceptionally low for a long time, with the Federal Reserve continuing to support low interest rates.
- COVID has turned our homes into offices, classrooms and sanctuaries for the outside world.
- Construction workers have been made redundant during the pandemic – very few new homes have been built.
- Wood prices are exceptionally high and increasing. Estimates are that the cost of construction has increased by $ 80,000 for an average home.
- Many large manufacturers have slowed down production while waiting for the cost of doing business to stabilize. (Some return deposits because they cannot build are prices previously quoted).
- Inventories are estimated at a very low supply over 2.4 months at the current rate of sales.
- Currently, there are about half the number of homes on the market compared to the winter season which is traditionally much slower.
- The high cost of buying a replacement home has caused many potential sellers to decide not to sell their current home.
- All consumption costs are increasing rapidly (inflation).
- Inflation increases the pressure to raise interest rates. An increase in the interest rate from 2.75% to 3.25% will reduce a buyer’s purchasing power by an average of $ 23,250.
- The pent-up demand for travel causes consumers to spend more on flights, vacations, family visits, and entertainment – less savings on a home.
- The pandemic stimulus boost is mainly in the rearview mirror (less savings on down payments).
The scorching home market of 2021 has peaked in affordability very well.
Whether we like it or not, we may be on the verge of a slowdown. That’s not to say that it will instantly become a buyer’s market in two months. However, every day more and more buyers are excluded from the market. They give up. Finally, the home buying frenzy has excluded millions of Americans from the market. The National Association of Home Builders says about 60% of households can no longer afford the home at the median price. Since most of the increase in costs has occurred at the lower end of the market, the number of first-time buyers has no choice but to decrease.
Sellers recognize the top of the market. Two-week data from realtor.com indicates that more and more sellers are putting homes on the market. More recently, new listings have risen 7% after also increasing in March and April after briefly dropping the first part of June. If the rise in listings continues, we can expect it to moderate the feverish price growth of the past year somewhat.
Also this week, the Federal Reserve indicated that it would closely monitor interest rates. Right now, there are no plans to hike rates, but closer scrutiny reinforces fears that the economy will recover faster than expected. A rate hike could come sooner than expected to keep inflation under control.
New home completions edged up in May, but new permits were down at the start of the summer construction months. Lumber prices and the labor shortage continue to keep new home construction seriously below demand.
A March survey by Fannie Mae indicated that more Americans have lost confidence that this is the right time to buy, with buyer confidence falling by 4%. If this sentiment persists, it means fewer new buyers are entering the market while existing buyers are giving up. The expected result may be a market downturn.
The key indicators to watch are interest rates, stocks and consumer confidence. The affordability problem may finally have reached the top. The median price of listed homes in the United States is expected to exceed $ 395,000 in June. The top end of the market for well-skilled Millennials may very well be a 3-bedroom, 2.5-bath home for $ 360,000 or less.
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Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.