Will the rising price of housing ever end?
01/07/22 Written by Courtney Richards
Ask people about how real estate was affected by the recent pandemic, and they tend to give the same answer: buying a house got way more expensive.
Now, after nearly two years of soaring prices, buyers, sellers, and agents all may be wondering whether the price of homes will ever drop or even level off.
There are signs that the market is cooling, but also broad economic trends indicating that the price of homes, along with the price of everything else, isn’t likely to plunge anytime soon.
Here, we take a look at some of the factors affecting housing prices. Agents can use this guide to plan for this year and to answer inevitable client questions about how expensive buying a home will be in 2022.
It’s natural for clients to wonder: Why have home prices risen sharply over the past two years?
In short, the answer is classic supply and demand. Demand for buying was turbocharged by lower mortgage rates that incentivized buyers to borrow and COVID-related changes to how we live and work that left people yearning for more space. Supply was constrained by a slowdown that made it hard for home builders to get the materials necessary to build new homes.
This glut of eager homebuyers and a limited supply of homes led to the hottest housing market on record, with the average American home price increasing by 25% since March 2020.
Add in burgeoning iBuying technology and the trend of real estate investors snapping up homes, and it’s no wonder that many would-be first-time home buyers have found themselves priced out of the market. Conversely, high prices have been a boon to home sellers, who have been able to sell their homes quickly and often above the original listing price.
Clearly, the high price of homes affects your clients, whether they’re buyers or sellers. As you counsel your clients about home prices this year, keep an eye on these three market factors.
Ultralow mortgage interest rates fueled much of the recent housing boom. For people who kept their jobs throughout the pandemic and saved money, low interest rates meant low borrowing costs, which helped drive up the price of homes.
These ultralow rates appear to be coming to an end. The average rate for a 30-year fixed-rate loan is now 3.22%, up from a year ago, when the rate was at 2.65%. Plus, the Federal Reserve plans to raise short-term interest rates this year, which will likely cause mortgage rates to rise further.
In January 2020, the average mortgage rate was 3.7%, and the National Association of Realtors expects that rate to return by the end of 2022. While that rate is unlikely to crater the housing market, it would likely result in a slower rise in home prices.
Overall, you should keep an eye on mortgage rates. If the 30-year fixed mortgage rate approaches 4%, it’s a sign that the market is cooling, and that home prices are likely to stabilize.
If you’ve shopped for groceries or tried to buy a car, it’s been obvious: things are getting more expensive.
In 2021, the U.S. inflation rate rose the fastest it has in 40 years, to 6.8%. Whether inflation is likely to be temporary or persistent is unclear, but if history serves as a guide, inflation will affect the price of homes and the real estate strategies of buyers and sellers.
Traditionally, real estate has been a “safe haven” for investors, because home prices rise relative to the size of the economy. When inflation surges, homeowners are in a stronger position because the cost of homes rises alongside everything else.
For home buyers, especially first-time buyers, high inflation is bad news because it’s more expensive to buy a home and harder to save for a down payment. The opposite is true for sellers, who can jack up their asking price and still receive offers.
We recommend that you monitor the rate of inflation. If inflation rises, your clients should expect higher home prices. If, as some economists predict, inflation falls, the price of homes is less likely to rise, making for a more buyer-friendly market.
Among the most influential accelerants of home prices in 2020 and 2021 was a dearth of available homes.
During the past two years, home building suffered alongside many other industries, as pandemic-induced manufacturing shutdowns and slowdowns made it hard for builders to get the materials necessary to build a home.
Those issues haven’t entirely gone away, but new housing permits and construction starts have recently risen above pre-pandemic levels.
Monitor the rate of new home construction in your region. If new home construction skyrockets, the price of homes will likely be held in check. If there is minimal new construction and development, expect more buyers than available homes, and a rise in prices.
“Serving is my passion, real estate is my passion, what a perfect marriage”.
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