Over the past couple of weeks, I’ve had an increasing number of potential home buyers let me know they are putting their home search plans on hold until home prices come down. There is no doubt the current real estate market is crazy and I can completely understand where they are coming from. I’ve been in this business for nearly 20 years now and have experienced several market cycles, but admit I haven’t seen anything quite like this. I say that not because of what is happening, but why it is happening.

It’s obvious the current pace of appreciation isn’t sustainable. After all, wages aren’t going up as fast as home prices, but just because prices have been rising and bidding wars are happening all over the country does that mean we are in a bubble, or a crash is on the horizon? In order to answer that question, we have to take a look at why home prices are rising in the first place. Watch the following video, or continue reading below to learn more.

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To start, please know that I am not trying to convince you of anything one way or the other in this blog. I am simply trying to provide you with the information necessary for you to make the best decision for your particular situation, whatever that decision is. There are a lot of attention-grabbing headlines and misinformation out there. I spend a fair amount of time reviewing data and information, add some insights to help interpret that data, then share it with you.

Housing Supply

The last time the housing market was this active, with rapidly rising prices, was right before everything came crashing down in 2008. As such, it’s natural to think that we must be setting ourselves up for the same thing again. However, there are some major differences between the real estate market then compared to now. Back in 2008 nothing made sense (I know, this doesn’t seem to make sense either) as home prices were going up even though there were plenty of homes for sale. While many new home builders had lines of people at every phase release, resale homes weren’t receiving multiple offers and having bidding wars. The price of any product or service is usually based on the relationship between supply and demand. In the mid-2000s we had plenty of supply while demand was being artificially created by a desire to keep originating mortgages whether the applicant could afford the loan or not. (I cover this in detail in a recent blog about why home prices are rising so fast).

In a typical year, we see housing inventory hit a low point for the year in December and see inventory levels rise as we move from winter to spring in the new year. That hasn’t happened this year as shown on the following graph comparing the number of homes for sale across the country last year to this year;

As you can see, inventory levels have remained relatively flat and are well below year ago levels. The reason for this appears to be two-fold.

1. Homeowners who were planning on selling in 2020 decided not to due to the pandemic.

2. Homeowners reconsidering selling this year have been wary to list their home for sale due to concerns of not being able to find a home to move to.

Inventory levels here in Frisco and Prosper, although slightly improved from last month, continue to lag behind what we would expect to see this time of year;

Buyer Demand

Supply is only half the equation. Prices wouldn’t be increasing if there was supply without demand, but demand, which was already strong as we entered 2020, has only increased in the past year. Each year, the National Association of Home Builders (NAHB) does a survey to gauge the number of American adults planning on buying a home in the next 12 months. The percentage of adults that say they are planning on buying has home has increased each quarter since quarter 1 of 2020;

There is no doubt the definition of “home” has changed for many over the past year. Home has become the place where we work, go to school, watch movies, workout, vacation, etc., not to mention the shift towards a more permanent work from home environment for many has meant there is no longer a reason to live within a certain distance of the office. Record low mortgage rates have also fueled demand as mortgage payments have become less expensive than rent payments in many areas and helped keep affordability in check in the face of rising home prices.

Where Do We Go From Here?

As mentioned above, it’s obvious that home prices cannot continue rising at the pace they have been in much of the country. When mortgage rates rose a couple of weeks ago there was a slight decline in the number of new mortgage applications. Although mortgage rates did drop down again, it is widely expected by the majority of economists that mortgage rates will rise to about 3.75% this year. While still a historically great mortgage rate, the increase is likely to curtail demand slightly. Other buyers will take themselves out of the market simply because they don’t want to contend with the craziness anymore.

On the supply side, new home builders are building as fast as they can and are expected to build more new homes this year than any year in the past 14 years. There are challenges currently with lumber prices, material shortages, and having enough land ready to build on. Resale homes are also slowly starting to come back on the market as concerns about the pandemic ease and more sellers decide to take advantage of the favorable selling conditions. The majority of economists recently surveyed expect inventory levels will start to improve in the second half of this year;

Bottom Line

While the real estate market is certainly crazy, the fundamentals remain strong. While I do believe the pace of home price appreciation will level off as inventory levels and mortgage rates rise, I don’t believe we are in a bubble or heading for a crash (see 3 Reasons We Are Not in a Housing Bubble.) Will some markets likely see some sort of a correction in the future, yes. When will that be? The crystal ball has low clouds and foggy conditions right now so be sure to check back later for additional updates!

In the meantime, if you have additional questions or a specific situation you would like to discuss please Schedule a Call with me. I’m always happy to talk with you and there’s never a cost or any obligation.