We all know the real estate market has been scorching hot over the past couple of years and it’s not showing any signs of slowing down…or is it? The bullish housing trend started in the summer of 2020 when Covid was running rampant. Many experts were expecting the market to underperform due to the lockdowns, but somehow the complete opposite transpired. Why do you ask? Well for one, it’s been rather cheap to borrow from the bank, with interest rates at all-time lows. At the same time, many employers started allowing their employees to work remotely. With low rates and the ability to work from anywhere many city dwellers made the decision to move to the suburbs. It also sparked families to realize if everyone is going to be home, then they’ll need more space. These two factors caused an organic increase in demand that has been driving up the prices of existing homes ever since.
Supply and Demand
High demand and low inventory are equating to rising home prices. It’s supply and demand 101. Looking at supply first, inventory is down more than +20% year over year. Meanwhile, demand remains strong. With more buyers than sellers in the market, housing prices will continue to rise across the US. According to the National Association of Realtors, the median home price has soared from $329k in March 2021 to nearly $363k in February 2022. That’s an increase of 20.6% from March 2021 to March 2022. Remember the average home price increase per year is roughly 3.5 to 3.8 percent.
Interest rates will play a major factor in whether the real estate market can keep up this pace or if it’s going to level off. It should come as no surprise that rates are at an all-time low and they’ve been creeping up since the Fed meeting in March 2022. As the Fed continues to tighten and raise rates, banks will have stricter lending constraints. While rates continue to move above 5%, it’s important to note that we’re still below historical mortgage rates. With rates increasing, buyers will be reluctant to enter bidding wars knowing their money won’t go as far. As inflation hits a 40-year high of 8.5 percent, people’s disposable income is certain to decrease as prices of food and gas continue to rise. Factoring in an interest rate above 5 percent and inflation at an all-time high, homebuyers should be hesitant to offer way above listing prices or get into a bidding war.
There has been a hand full of factors that have contributed to the astounding growth in the real estate market as mentioned earlier. Yes, demand is significantly outpacing supply at this point, but there are indications the market is starting to cool off. Homebuyers are becoming less willing to enter a bidding war only to find they’ll have a higher payment all in part to a higher interest rate on their loan. That higher payment combined with 8.5 percent inflation will significantly affect a family’s disposable income. Homebuyers are more likely to sit on the sidelines as either they’ve priced themselves out of the market or they’re willing to wait until the real estate market corrects. Be smart, don’t get caught up in the buying. Homes prices will correct as we start to witness the market shifting from a seller’s to a buyer’s market.