What Is Happening with the Housing Market?

If you're on the hunt for a new home (or a second home), then you understand how bizarre the U.S. real estate market is right now. If you're one of the lucky people to have bought real estate pre-COVID and blissfully unaware of the state of the market right now, let me paint a picture for you:

Between April 2020 and April 2021, median house prices rose 19% to $341,600.

Over half of home-buyers are putting at least 20% down, the highest in history.

Since January 2020, 1,500 homes in Austin, TX sold for more than $100k over asking (72 of which sold for more than $300k over asking).

In Denver, Colorado, a urine-saturated, feces-infested, vandalized home sold for $590,000 after receiving 16 cash offers after only 24 hours of being listed. 

• Between April 2020 and April 2021, median house prices rose 19% to $341,600.

• Over half of home-buyers are putting at least 20% down, the highest in history.

• Since January 2020, 1,500 homes in Austin, TX sold for more than $100k over asking (72 of which sold for more than $300k over asking).

• In Denver, Colorado, a urine-saturated, feces-infested, vandalized home sold for $590,000 after receiving 16 cash offers after only 24 hours of being listed. 

This is a small glimpse of the insanity of the current real estate market in the U.S. While this is great news for sellers, it's not great news for buyers, especially first-time home-buyers. 

So what is going on? What caused this madness?

Well, as much fun as it is to point the finger at a single villain (i.e. Blackrock), the situation is much more complex and nuanced than that. The frenzy was caused by several factors, much of which was ultimately fueled by the pandemic. So let's break it down.

Housing Supply Shortage

Taking it back to Econ 101, when supply is down, prices go up. And right now, there is a big shortage of homes. Over the past 20 years, construction of new homes were 5.5 million units short of historical levels. In the same report put out by the National Association of Realtors, between 2010 and 2020, we needed 6.8 million more homes than were constructed, due to population growth and deterioration of old homes. 

Worse yet, the pandemic delayed construction in many parts of the country in spring 2020, thereby reducing the supply of homes even more. In fact, the monthly housing supply (ratio of houses for sale to houses sold) went from 6.6 in April 2020 to a near all-time low of 3.5 in August 2020. This means that if no new homes were put on the market, there would be no more homes for sale after 3.5 months. To put that in perspective, this number was between 10-12 during the 2008-09 market crash, and has since hovered around 5.5 for the past 10 years. 

Pandemic Wealth

The other side of the equation is demand. And not only did the pandemic contribute to the low supply of homes, but it surprisingly contributed to the rising demand for homes. Demand for second homes nearly doubled pre-pandemic levels. The number of buyers who purchased a second home in April 2021 was up 178% from April 2020, while demand for primary residence is up 78% over that same time period. 

This past year was financially devastating for the lower-middle class, and financially prosperous for the middle-upper class. For those fortunate individuals who did not experience an interruption in income, they had the opportunity to not only save more (from reduced expenses and dependable income), but also had the chance to invest in the stock market at the best possible time when it tanked in March 2020. Those with extra cash on hand easily doubled their money over the course of a year by simply investing in the market when it was at the bottom. The end result is a lot of middle-upper class people with a big chunk of liquid assets, waiting to be used.

With buckets of cash on hand, wealthy individuals have been able to make sizeable down payments and offer significantly above asking, with the hopes of owning rental properties or second vacation homes. For those without substantial cash for a down payment, this makes buying a starter, single-family home very difficult. For some home buyers, a 5% down payment isn't enough, since they are now competing against buyers who can afford a 20-30% down payment, a more reliable, attractive offer for sellers who are anxious to close. 

Institutional Investors

But wealthy individuals aren't the only ones seeking out homes for an investment opportunity. Private-equity firms are also buying single-family homes for the purpose of renting them out to families across the country, in hopes of creating a consistent cash flow stream. You may have seen the WSJ article back in April that shared a story of an investment firm buying an entire neighborhood in Conroe, Texas. This sparked a lot of concern over investment companies outbidding individuals and driving the price of single-family homes even further. 

While there is still debate on how much market influence these investment companies have, they most definitely play a role in the rising home prices. Anecdotally speaking, I recently visited a home-for-sale just a few hours after it had gone on the market, and the selling realtor informed us that they already had two offers from investors. Now, whether "investors" means high-net worth individuals or institutional investors, I don't know. 

But the moral of the story is the same: Big money is coming into these single-family home communities, offering large down payments (or all cash), and offering way above asking, thereby pushing out lower-middle class first-time home-buyers. 

Low Interest Rates

Of course, it wouldn't be a complete discussion without mentioning the historically low interest rates. Driven by the 0% Federal Funds Rate, mortgage rates are at an absolutely all-time low of roughly 2.93% (for a 30-Yr mortgage). This extremely low cost of borrowing makes the demand for houses even higher, as many people aim to lock in a mortgage rate that they'll possibly never see again. 

When Will It End?

If I knew that, I'd be rich. Unlike the 2008-09 housing crisis, driven (partially) by banks offering loans to uncreditworthy borrowers, a lot of transactions today driving home prices higher come from wealthy individuals and multi-billion dollar investment companies who can not only afford to make payments on expensive homes, but in many cases, are buying those expensive homes in cash outright. 

So I have no idea how this ends. It seems like the rising prices are unsustainable, but I said the same thing 3 years ago. And since then, the growth has continued. I don’t think anyone would have predicted that, in a year of a pandemic, the real estate market would be the highest we've ever seen it. That just goes to show that we can't predict the future.

If you're a seller, good for you. If you're a buyer, best of luck!