Recently, housing prices have increased quite significantly. In a good real-estate market, a 3%-5% return per year on your property is considered good. As of March 2021 the median sale price of a house in the U.S. increased by 17.2% from last year! With the advent of the worldwide pandemic, many industries have been dramatically benefited or been hurt. The housing market is no exception. Since March of last year the housing market has faced lots of uncertainty regarding mortgage defaults, a short supply of houses, and an increased cost in building materials. All of these factors have created a market where housing price increases. So, with housing prices rising so high in such a short period of time it begs the question… Will it all come crashing down?
Not Enough Homes on the Market
When the coronavirus hit the United States, many of homeowners were fearful and decided to wait-out the pandemic to sell their homes. This had a huge impact on the housing market. In April of 2020, the monthly housing supply was at 6.8 meaning that the housing market’s inventory would last for nearly seven months assuming no more homes were added to the supply. As March of 2021, the monthly housing supply is at 3.6, nearly a 50% decrease in supply. In addition to this, the U.S. government introduced forbearance which stalled supply further by preventing some homes from coming to market.
Not only did supply of the housing market decrease but demand actually increased. When the pandemic hit initially, the Fed reduced their lending rates to near zero. This in-turn caused mortgage loan rates to drop significantly as well. Which then led to more buyers coming into the housing market so they could utilize a low interest mortgage loan. So the pandemic indirectly caused a perfect storm in the housing market for prices to rise. Making supply decrease and demand increase only leaves the laws of supply & demand to take effect and increase the price.
Will More Homes Come to the Market?
With so much demand in the housing market, it would make sense for property developers to build homes as quickly as possible to profit from the artificially high prices and also add supply to the market. However, the pandemic caused an obstacle for property developers. With covid restrictions, the demand for construction materials decreased which led producers to match demand and decrease their output. So when a sudden increase in demand for materials happened the producers were unprepared to meet the demand.
So once more, a high demand met a short supply and thus prices increased. According to the Bureau of Labor Statistics, prices from March 2020 to March 2021 for lumber have increased by 65.3%, steel mill products by 40.1%, and Materials for Construction by 13.5%. Plus, because of the sudden spike in demand for materials, producers haven’t been able to keep up. This has led to higher wait time for materials. In essence, more homes coming to the market is not going to happen quickly.
Will The Market Crash? Here Are My Thoughts.
Although prices of homes have scarily increased in the past year and the entire market is in odd circumstances, a housing crash isn’t very likely. This spike in prices is very different from the crisis back in 2008. The current situation doesn’t have thousands of homeowners and buyers at risk of default. In fact, forbearance is being offered which protects homeowners that may have been affected by the pandemic from foreclosing. Overall, the current housing market is nothing like what happened in 2008. This event is its own unique situation and it should be treated as such.
What is happening now is similar to a bogged down shredder, there’s too much demand in the shredder for the shredder to clear. Covid has indirectly caused a short supply and high demand and also limited the ways to alleviate the supply problem. As soon as the economy re-opens and things “get back to normal”, the market will be able to add supply like it wants to do and clear up the “bubble”. This will bring prices back down to a more expected and comfortable level. That being said, this won’t happen overnight even if the U.S. were to fully reopen tomorrow. The market will level out gradually over time and I believe this is good. Since many of us get scared of sudden spikes up or down, a gradual change would be nice to see.
The real-estate market is like the stock market, it will see its ups and downs. And like the stock market, you can benefit from being invested in real-estate… Come back tomorrow for our article that will teach you how to profit off of the housing market!