Real Estate Market Vs Wild Wild West

Author ProRinger Author - May 06, 2021
  • Real Estate

Let's start this with a little fact check that might make you say, what?! According to data from the U.S. Census Bureau, the average price of a single-family home in 1940 was just $2,938. Even when adjusted for inflation, that figure only reaches $30,600. Keep that number in mind because later in this article, we will reveal the current average home price in 2021. 

The real estate market has been red hot for nearly one year. Buyers are scrambling to purchase during this all-time low mortgage rate era. Many are questioning, "How can this continue and when will the bubble burst?"

There are many factors causing the housing market to skyrocket. Let's touch on a few of them in this article. We are going to dive a little deeper than just saying mortgage rates are at an all-time low causing buyers to flood the market because they can afford more.  Yes, that definitely plays a massive role in what's happening with real estate prices but that is not the whole story. 

Hopefully, by the end of this article, you will understand a little more about why real estate prices are booming and if this could continue into 2022 and beyond.

Mortgage Rates

First thing's FIRST. We all know that story about lower interest rates and how it helps boost the amount that a family can afford on a monthly basis. Let's dive into that a little deeper. 

In the infographic above, you will notice for every 1% decrease in the mortgage rate, the borrower can afford roughly 10% more. A $400,000 loan at 3.75% (roughly the interest rate from last year) and with 20% down (to avoid the Mortgage Insurance) your P/I payment would be $1810 per month. Drop that to 2.75% (where rates are currently) and that same $400k loan only cost $1635 a month. Meaning, if that borrower can afford the $1810 a month now, they can and most likely be seeking a $440-445K loan at 2.75%. 

With that said, you should be able to clearly see how a 10% year over year increase in real estate is achievable just with lowering rates. And quite frankly, this is sustainable as long as rates stay low. However, there are other factors that are helping support the rising prices of real estate. Let's jump into those next.

Exploding cost of building materials

Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago. According to the (NAHB) National Association of Home Builders, the cost of lumber has contributed a $36,000 increase to the average home.  So the question is, what is the average cost of a home in the United States?

According to the National Association of Realtors, the medium existing single-family home sale price was reported to be $329,100 up 17.2% year over year from March 2020 to March 2021. 

Considering the average home price is roughly $329k, and $36k of that was due to the rise of lumber cost, it could be argued that 12% of the 17.2% year over year rise was due to lumber cost alone.   

More on this in an upcoming article but ask yourself this, "How can the price of a home drop when the cost of materials is at all-time highs?" For instance, a sheet of 4-by-8-foot (OSB) that recently sold for just more than $10 - Now, is selling for around $55! That's only one example. 

With the buying power increased by 10% due to lower interest rate and lumber cost increasing a home 12% in cost, is the 17.2% increase of the average home an actual deal? So far not factoring in supply and demand or other financial factors, we are looking at a potential 22% increase in real estate prices vs. the actual 17.2% we have seen year over year. 

Supply and Demand

As of the end of March 2021, housing inventory slightly rose to 1.07 million units, down by 28.2% year-over-year. Properties typically sold in 18 days, a record low. (per NAR data) 

There simply aren't enough homes for the number of buyers in the market. Creating situations where buyers are willing to paying more than asking and in some cases much much more, to get the house they want. In this current market, a bidding war scenario has actually become normal in most parts of the country.  

Over 70% of the buyers that we have spoken to have told us that they entered in a bidding war to get into a contract on a property. If you aren't willing to pay more than asking in this market, it's safe to say you might get left in the past.

Bombing Stock Market

While the housing market is red hot - so is the US Stock market! Millions of Americans are invested in the stock market in one form or another. Generally speaking, when the stock market is doing good most people's 401K's and retirement accounts are doing good. People feel wealthier and tend to purchase more. We are not saying this is advisable or the right thing to do but it happens more often than not. 

In our overview, this plays a role in the sentiment of an individual feeling better about their checking, saving, retirement, and overall wealth. When most people have more money in the bank, what do they do with it... they tend to spend it. Currently, they are spending it on real estate either as down payments or towards buying down points to lower their monthly mortgage payment. 

The cost of borrowing money has never been lower. 2.75% on a mortgage is unheard of in the United States. Just a short time ago, in the 80's it was normal to have a mortgage loan with an interest rate of 14% to 15%.   

Will it continue into 2022

No one really knows. However, if you believe that the current conditions will not be changing for 6 - 12 months it is very likely we continue to see housing prices soar. However, if you think the Federal Reserve Bank will start to increase rates and that building material costs will drop within that same timeframe, it's very likely we will start to see real estate prices stabilize or even take a dip. It is likely if the FED increases rates that the US stock market would take a short-term hit as well. Which ultimately will change the environment we are in. 

What almost everyone can agree on is that a 17.2% year over year increase is not sustainable for the long term. However, that does not mean the real estate market will crash. If prices can start to stabilize then it might bring some order to the market and save us all from a possible repeat of 2007-2008, although we are under different circumstances. 

Things to consider for the future

The Downpayment Toward Equity Act would allow first-time homebuyers, defined as those who have not owned a home in the prior three years — who are also first-generation homebuyers — to receive up to $25,000 in down payment assistance at closing. So there is some more free money that would help support the rising cost of real estate.

Let's explore some private programs from lenders themselves. For example, Bank of America is offering up to $17,500 in assistance to any borrower using them as a lender. Their program is in the form of a grant and is not subject to repayment. Too good to be true, you may ask? No, it's the real deal and partially the reason I chose to label this article "Real Estate Market vs Wild Wild West." Check out Bank of American's grant program

Leave us a comment below. Do you think the real estate market is about to burst or does it keep going into 2022 or even 2023? We would love to hear your thoughts. 

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