What a difference a year makes! In the summer of 2020, many real estate professionals nervously watched as a pandemic slowed the nation to a crawl. Some worried the real estate market might take a massive hit. One year later, the real estate market is booming. Home prices are soaring. Inventory is at an all-time low, leading to bidding wars, cash offers well above asking, and a banner year for real estate agents. We’re recapping the real estate market boom of 2021, with a look ahead to what experts say we can expect moving forward.
Low Inventory Means High Prices – And LOTS of Heartbreak
These historic home prices are linked to one foundational economic concept: supply and demand.
While the current real estate market trends have been great news for home sellers, many buyers and buyers’ agents will remember 2021 as a year of discouragement. We’ve heard this story over and over again from buyers’ agents: families who find a home they love, and write the strongest offer possible, only to be outbid, sometimes by all-cash buyers. Families are losing out on home after home, facing heartbreak as they hear “no” over and over again.
The new construction market isn’t much better. Housing construction companies still have very raw scars from the Great Recession. As a result, these builders have made it a policy to underbuild, even as demand heats up. Rising supply costs only add to the frustration.
Some agents report buyers who eventually give up on the home buying process altogether, choosing to rent instead.
Real Estate Market Trends and the COVID-19 Pandemic
Though it might feel like real estate market trends took a sharp step upward in 2021, this housing shortage is decades in the making. Even as far back as 2001, the National Association of Realtors identified a potential housing demand gap. In the two decades since, the NAR reports an estimated shortage of 5.5 to 6.8 million homes nationwide.
The pandemic merely exasperated the lack of real estate inventory. As many workers started working from home (and spending nearly all their time at home), the nation saw a sharp increase in demand for single-family homes. Of course, drastically decreased supply and drastically increased demand led to the absolutely shocking price increases we’ve seen over the past year.
In addition, the Federal Reserve cut interest rates during the pandemic amid fears of an economic crisis. As a result, many mortgage lenders also dropped interest rates, leading to some of the lowest mortgage interest rates we have seen in decades. These low rates encouraged buyers to scoop up both primary residences and vacation properties nationwide. The sudden surge in buying far outpaced available inventory, leading to surging prices, bidding wars, and an incredibly competitive real estate market.
New Construction Homes
As the pandemic spread throughout the nation in the spring of 2020, construction projects from coast to coast came to a halt. Health concerns overshadowed the need for housing, and many multifamily and single-family building projects stopped for months. Even when workers returned to these job sites, the projects took longer than in pre-COVID times because of health concerns, lost time due to COVID outbreaks, and supply chain issues.
These delays added to an inventory shortage that was already problematic. Now, with home builders returning to work, they’re struggling to find employees, leading to even longer wait times. All of these factors are bad news for an already overloaded housing market.
New construction home sales are up year over year, but the supply of new-builds is also facing a shortage. Adding frustration to the home construction market are lumber and supply costs, which rose some 30% from January to May. Prices more than doubled year over year. Naturally, those rising costs were passed on to homebuyers by the home builders. At one point, it wasn’t uncommon for builders to raise new home prices by tens of thousands of dollars to cover those rising costs. Lumber prices have now dropped significantly, but buyers can still expect to pay top-dollar for new construction properties.
Whether buying an existing home or building from the ground up, buyers are feeling the supply-demand pinch. Some markets have seen home prices skyrocket by as much as 20%-30% year over year. Many economists and real estate experts expect that prices will start to level off and return to a more normal growth rate. However, the inventory shortage will remain a driving factor into next year.
Will These Real Estate Market Trends Continue?
Recent data suggests that the housing market is cooling a bit heading into Fall. That doesn’t mean housing prices will drop or that we will see a surge in inventory. It does mean that housing prices might rise a little less dramatically, and buyers will once again have more options when buying a home. Consequently, buyers will also face less competition, making them more likely to get their offer accepted.
Of course, the dramatic increase in home prices during 2021 begs the question: are we in for another real estate market crash? While nothing is for certain in real estate (as we all well know), most experts say that a major market correction is NOT likely. Unlike the housing crash 15 years ago, lenders are more selective about applicants, so we’re not seeing underqualified buyers purchasing homes they simply can’t afford. Additionally, real estate laws and regulations have changed, making it easier for investors to buy properties. This means there are fewer homes in foreclosure, which ultimately pads the entire market.
One factor that could impact the supply-demand chain over the next few years is the millennial home buyer. Though the inventory is starting to catch up just a bit, an influx of young, first-time homebuyers could place additional stress on the market, leading to an even greater inventory shortage.
Better News for First-Time and Low-Income Homebuyers
Many in this generation are reaching home-buying age, and they’re ready to start shopping. As home prices level out and inventory starts to catch up, there will be more opportunities for younger buyers to find a home. If interest rates stay low (as they’re expected to do for at least another year), younger buyers are more likely to start purchasing real estate.
The millennial generation waited longer to purchase homes than the generations before them. However, many are now starting families of their own and settling down into single-family homes. And with millennials representing a larger population than Baby Boomers, that’s a lot of first-time homebuyers entering the buying pool. With inventory so low, this influx of new buyers could add even more stress to an already competitive buying market.
However, there is still hope for first-time and low-income buyers. Sure, there was a point this summer when those with FHA loans weren’t even considered as serious contenders during a bidding war. When presented with dozens of offers, sellers were more likely to pick a cash or convention loan offer.
Now that the market is leveling out, we see homes staying on the market longer. Sellers are more motivated to accept FHA loans and other first-time and low-income home buying programs. If buyers see a glimmer of light at the end of this real estate tunnel, they’re more likely to throw their hat in the ring and buy a home. Increasing inventory and decreasing demand, paired with historically low interest rates, are helping more young people buy their first home.
The real estate market trends for 2020 and 2021 have been anything but ordinary. It’s been a wild ride, but there are indications the market is starting to level off. As more inventory becomes available and the competition becomes a little less intense, homebuyers finally feel more confident about finding a home of their own.