This blog is a direct transcript from the video below. This comes in 3 versions: You are able to watch the video, read the blog for your convenience or listen to the audio experience (which is linked under the video below).
These days it’s not out of the ordinary to see a multiple offer scenario on a house that results in $20,000 over asking price.
As these transactions follow the same suit across the nation, these sold figures create a comparable selling price to homeowners who are thinking of selling in the near future. It becomes a vicious cycle, because at the end of the day, it’s about how much a buyer is willing to spend for a home that determines real estate prices in the market.
Obviously, you will need to factor in inflation, supply vs. demand and the fact that according to the Pew Research center, and anyone who has followed the history of wages and housing prices, the growth has an extreme imbalance. wages grow on average 2-3% a year today, whereas back in the 70’s and 80’s wages would grow 8-9% per year. In today’s economy, the highest wage growth will go to the top 2-3% of the population anyway.
According to a Harvard university study about housing, the ratio of median home price to median income was 4.1, meaning the median price of housing is 4.1 times greater than the median income.
So when an older person gets on you about not moving into your first home at the age of 20-21, you now have the facts to support your argument that it simply isn’t as easy as it used to be.
One of the biggest answers to “why are homes so expensive?” is the supply and demand issue. If you have been following me for a while or any other real estate professional for that matter, we have been creating awareness for low inventory to create awareness about how important this topic is.
Okay so who cares if there’s not a lot of homes on the market? Well, you should especially if you’re looking to buy one, or sell one for that matter. Low inventory, and the low mortgage rates as of late are just driving prices higher. It creates a substantial amount of demand on the buyers side, which is why some buyers are willing to spend $20,000 over the asking price to get a home in today’s market. Just to create a little perspective, when a home is put on the market, every buyer on the sidelines see’s it, inventory is low so there truly is no way of missing it. Buyers reach out to their agents to schedule the showing and they pile up outside the home like the zombies did on that wall in the movie world war z.
Rhea Thomas, who is a senior economist at Wilmington trust in Philadelphia, laid out 5 points that truly explain what has been affecting the housing prices over the years.
First off, the increase in local zoning laws. When restrictions are created as to where homes can be built, builders lack a little confidence that these less desirable areas won’t be appealing to potential buyers .
In doing so, this lowers the overall supply of homes, as with these restrictions comes stricter permit requirements that will cost more resulting in higher priced new construction homes. A new construction home that’s overpriced and is not in a desirable location is a risk most builders are not willing to take. You might be thinking, a new house sounds just fine in an area that isn’t necessarily the best. Fair point, but this location isn’t just something on a “want” list, most people need a desirable location for an easy commute to their workplace.
Secondly, as I mentioned in a lot of my previous videos, podcasts, blogs, etc., new construction costs are high, there’s a shortage of lumber which is a prime example of supply and demand, low supply, higher demand, higher prices. Not only is lumber a costly item, so are some of those items that are purchased overseas, such as wall panels, flooring, metals and other finishes, because tariffs were raised 10-25%. That was done in the previous administration, so obviously things have a pension to change. On top of all of that, land isn’t getting any cheaper either.
As I mentioned before, builders are lacking confidence, some of the seasoned builders are having flashbacks about the 2007 housing crisis and truly don’t know what to expect the future to hold. This was a point that was heavily realized at the end of 2020, so you can bet confidence has since increased since then as covid vaccines are being disbursed and the economy has since bounced back a little bit.
That brings us to lower interest rates, as a buyer of any product out there, the rate at which you pay interest for the term of the loan is very appealing especially when it’s low, so we can agree it makes sense for there to be a plethora of buyers on the sidelines looking for a home right now.
Low interest rates, covid unemployment relief + a stimulus check = more buying opportunity than most know what to do with!
The National Association of Realtors did a generational trend report recently and found that the demographics of homebuyers are changing drastically. 38% of homebuyers are millennials, and with changing demographics comes a new set of wants and needs in the real estate market.
The question is, who is feeling the effects of this new real estate market? First time home buyers for sure. Years ago, your parents may or may not have told you to start saving up for a house. So your parents suggest you dump a little from each paycheck into your savings and never touch it until the time comes. When that time does come you have $20,000 let’s just say for down paint and closing costs, but the house you want to start your life in has a bidding war going on and they ask for the highest and best offer in two days and the agent mentions it’s well over asking price.
You saved that $20,000 for a normal situation where you put an offer in a decently priced home and you get it accepted, well now you’re having to bring another $10,000-$20,000 to the table on top of that! Must first time home buyers can’t afford that and take a seat on the sidelines or temporarily lease a place until another home pops up.
Give one of my recent podcast episodes a listen about Short-Term Buying Vs. Renting, just to give you a little perspective on some of your options!
It truly is a terrible situation, and not only for first time home buyers, but for investors as well. With higher demand comes a higher overall cost, so many investors aren’t finding all the deals they once were, so they don’t invest as much and this eliminates renting opportunities for first time home buyers who can’t find a home. But for the investors that can pile up all the capital to buy something overpriced, they are charging more for rent to match the demand for housing, which also poses issues for affordability. See how everyone plays a vital role in the real estate cycle?
I know it all sounds so temporary and the market will snap back like it always does, but what if it doesn’t? Urban institute came out with a report recently that found that if the housing market continues in the direction it is for the next 2 decades, homeownership will decline 62.1%. Two decades seem like a long time but keep in mind that the housing market has been struggling to keep up demand for the past decade. There really hasn’t been this crazy surplus of homes in recent years.
That brings us to another frequently asked question, is the housing market going to crash in 2021? The answer is, not likely, the economy is expected to grow 5.3% this year according to recent commentary from the economic and strategic research group.
Housing activity will surely remain strong, but will most likely simmer down just a little bit the second half of 2021.
As I mentioned earlier, the real estate market depends on the activity between buyers and sellers, so to get a little glimpse of the future, a survey of consumer expectations was done to figure out how many people think it’s a good or bad time to sell or buy a home. Compared to the survey conducted prior, respondents who said it’s a good time to buy decreased 5% to 52% whereas the respondents who said it’s a bad time to buy increased 4% to 39%.
Those who said it’s a good time to sell a home decreased 9% to 50% whereas the percentage who said it’s a bad time to sell increased 9% to 42%. Respondents who think home prices will go down increase 3% to 16% and the people who think prices will stay the same decreased 1% to 34%.
And lastly, those who took the survey who believe their income was higher than it was 12 months ago dropped 4% whereas the people who said it stayed the same increased 4% to 61%.
So why do any of these percentages matter? Because like i said, the real estate market depends on the activities done by buyers and sellers, and that’s exactly what you, me, and these surveyors are.
What Are Your Thoughts?
Cheers,
Andrew
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in White Lake, Michigan.