May 25th, 2023 7:00am PDT
(PenniesToSave.com) – Predicting the housing market is a daunting task. Despite the abundance of data, forecasts, and self-proclaimed experts who claim to have all the answers about home prices and borrowing rates, the truth is that buying a home can feel like a game of chance. Sometimes luck favors you, and you purchase a property just before prices soar. Other times, unfortunate circumstances lead you to invest right before a housing bubble bursts.
Predicting these pivotal moments in advance is nearly impossible, but they become unmistakably clear in retrospect. A notable example that remains vivid in recent memory is the divergent experiences of homebuyers, which gave rise to what experts dubbed a “housing economy of ‘haves’ and ‘have-nots'” in July 2020. It became apparent at that time that a surge of millennials searching for homes and remote workers craving additional space had transformed the initial housing market slump caused by the pandemic into a frenzy of buying activity.
The difference between those who bought homes before and after that pivotal moment is striking. Those who entered the market earlier were fortunate to avoid high home prices, secure low mortgage rates, and build significant equity over the past few years. In contrast, those who stayed on the sidelines have seen their rental expenses eat into their down-payment savings, witnessed a drastic 30% increase in median home prices, faced rising mortgage rates, and encountered a shortage of available homes at record lows.
The housing market is facing a significant issue of supply and demand imbalance, which has notable consequences. With each passing month, more millennials and now Gen Zers are reaching a point in their lives where they want to settle down and become homeowners. However, the number of available homes for sale remains surprisingly low, particularly during what is typically a busy spring selling season. There is no immediate increase in new homes anticipated that could alleviate the shortage significantly. Furthermore, existing homeowners have little incentive to move since doing so would mean giving up the advantage of exceptionally low mortgage rates that provide manageable payments for many years.
The housing market has undergone a permanent transformation, and with the wisdom gained over time, we can identify the exact moment it transitioned into a new era. It’s a challenging landscape characterized by a scarcity of available homes, a sharp rebound in borrowing rates from their historically low levels, and homeowners feeling constrained by the favorable deals they secured earlier in the pandemic.
Topsy-Turvy Market
Two key events during the initial response to the pandemic propelled the housing market into uncharted territory. Firstly, historically low borrowing rates were implemented by the Federal Reserve as a means to boost the economy. This lowered mortgage loan accessibility for individuals and radically shifted buyers’ expectations, leaving a lasting impact for years to come. Secondly, with remote work becoming widespread, there has been an exponential increase in demand for homes. This rapid change accelerated years’ worth of homebuying activity, resulting in a frenzied rush to secure properties and greatly distorting the market. As a result of these factors, competition in the housing market has reached unprecedented levels, presenting prospective buyers with increasingly challenging hurdles to overcome.
In the memorable July of the pandemic’s inaugural year, there was an unprecedented surge in home sales that eclipsed any previous monthly records since 2011, when data collection began for the National Association of Realtors. This incredible upswing prompted the organization to herald a “V-shaped housing-market recovery.” First-time homebuyers eagerly joined the market, representing 34% of all home purchases. In the third quarter of that year, the median price for homes soared to $337,500, marking a notable 5% increase from the preceding quarter and signaling the start of a two-year period marked by substantial price growth. The catalyst behind this sudden transformation was a significant drop in mortgage rates, which dipped below 3% for standard 30-year loans during that momentous month.
As the dust settles from the tumultuous past few years, it becomes clear which changes induced by the pandemic will have a lasting impact. Homebuyers and real estate agents are adjusting to a new reality after experiencing a red-hot market in the early stages of the pandemic. Now, they face challenges such as increased borrowing rates, a decrease in transactions, and a scarcity of available homes. This tight supply has created fierce competition among buyers for limited listings.
This year, the usual busy spring selling season, when inventory typically increases as people prepare to move during the summer, has not happened as expected. In March, Black Knight, a mortgage software and data provider, reported that the number of properties listed for sale was approximately 30% lower than before the pandemic. Furthermore, Realtor.com found that existing home sales in April dropped by a significant 23% compared to the previous year.
Many homeowners are opting to stay in their current houses because they have locked-in mortgage rates that are much lower than the rates available for new loans. After a period of historically low rates in late 2021, the Federal Reserve’s decision to raise interest rates, which was intended to address inflation driven partly by the booming housing market, has caused borrowing costs to skyrocket. According to Freddie Mac, the average rate for a 30-year mortgage is now around 6.4%, reaching levels not seen since the Great Recession. As a result, this has discouraged people from listing their homes for sale and has contributed to a decrease in overall inventory levels.
According to statistics from Black Knight, around 86% of homeowners in the US who have mortgages currently enjoy interest rates at or below 5%. Additionally, half of all mortgages come with rates of 3.5% or lower. These figures represent significant decreases compared to the current prevailing levels. Furthermore, data from Redfin reveals that nearly three out of every five homeowners have relocated within the past four years. This suggests that even if interest rates were to decline further, many mortgage holders would have little motivation for hasty moves.
Haves and Have Nots
Homeowners who bought their homes before the market turned have seen a significant increase in their wealth in recent years. According to Black Knight, as of March, the average homeowner with a mortgage had around $185,102 in tappable equity. This means they can borrow against that amount while still maintaining a 20% stake in their home. This represents an impressive 54% increase compared to the same period last year. Additionally, data from the Federal Reserve shows that homeowners collectively gained an incredible $9 trillion in home equity over the two years leading up to October.
In contrast, renters have not benefited from these wealth increases. Instead, they are struggling with the growing burden of rental payments. According to Moody’s, the average American household had to allocate more than 30% of their income to rent an apartment at the average price last year. This is the first time in 25 years that the rent-to-income ratio has exceeded this threshold, as tracked by the firm.
For individuals looking to enter the housing market, there is compelling evidence to suggest that they are not reaping the same advantages. For example, in March 2020, $300,000 could have secured a property of approximately 2,000 square feet based on average prices per square foot data from Realtor.com. However, today, that same amount of money would only allow for a property of around 1,400 square feet. In just three years, buyers are receiving 30% less space for the identical dollar amount. Additionally, since the start of the pandemic, the National Association of Realtors’ housing affordability index has experienced a significant decline from approximately 180 to a mere 98 as of March.
The housing market during the pandemic has seen some unprecedented trends, which are now becoming the new normal. Bidding wars for homes continue to be fast and competitive. However, for those who missed out on the opportunity to build wealth in recent years, the long-term consequences could be devastating. Millennials, in particular, are experiencing delays in reaching key life milestones. They’re living with their parents for longer periods, delaying marriage and starting families, and facing extended waits to become homeowners. As a result, they have less wealth compared to previous generations, despite earning higher incomes. The significant increase in mortgage rates last year has only worsened the situation, creating a significant gap between those who secured low rates earlier in the pandemic and those who will face rising housing costs in the coming years.