Buyers looking for homes have had it tough this year, with scarce inventory, bidding wars, and mortgage rates that have skyrocketed over the years limiting their options.
But does this mean buyers should abandon the pursuit of homeownership? No. In fact, market shifts could actually prove beneficial for them.
1. Inventory is low.
Low home inventory levels are having a devastating effect on the housing market. Buyers now have less choices when searching for their dream home and prices are also increasing as investors buy homes to flip them for profit, creating competition between average homeowners who wish to buy one immediately and investors that purchase homes specifically to be sold back at profit - an acute challenge to buyers wanting an immediate move-in solution.
There are various reasons for low inventory levels; one being that homeowners who currently own homes are reluctant to sell due to the coronavirus pandemic; many had to remain in their home during this time, requiring more space than normal and thus driving up demand and prices. Also contributing is builders having difficulties due to high construction costs and shortage of skilled tradespeople resulting in slower construction schedules than usual.
Home prices have also continued to increase thanks to rising interest rates and an influx of millennials entering the housing market in record numbers. This bodes well for industry as millennials tend to be more interested in property investment than prior generations of homeowners; therefore, they will help push up market values by purchasing in greater numbers.
With inventory low, and many factors contributing to low levels of housing inventory, it is no wonder that the housing market is currently in a seller's market. If you are planning on purchasing a home soon, be prepared for more competition than usual and act fast when finding an attractive property as another buyer may also be keen on it - particularly true if looking for new construction homes or dealing with real estate agents who represent sellers.
2. Mortgage rates are high.
Purchase of a home is one of the biggest financial decisions most people will ever make, yet with interest rates so high, many can't afford mortgage payments and demand has decreased due to this phenomenon. This makes it harder for both buyers and sellers to achieve their goals and move towards their dreams of homeownership.
High mortgage rates have been driven up by multiple factors, including rate hikes by the Federal Reserve to counter inflation and restore economic equilibrium, changing consumer behavior and investment decisions by Wall Street investors, as well as regulatory measures taken against them by their government. It can be hard to pinpoint exactly why interest rates have increased so rapidly; whatever their source, it has made home purchase more challenging for homeowners and potential homebuyers alike.
Higher interest rates do decrease demand, but they may also cause some prospective buyers to opt-out completely from entering the housing market altogether. Although mortgage rates aren't directly set by the Federal Reserve, their increases typically cause lenders to increase their own rates as a response, meaning even if housing markets rebound substantially, potential buyers may decide against purchasing due to increased costs associated with financing their new homes.
Home sales surged during the COVID-19 pandemic and have remained high ever since, while mortgage rates have steadily climbed to their highest levels since 2010. This has caused market activity to decrease considerably and may continue to do so well into 2023.
However, despite slowing sales and rising mortgage rates, there remain plenty of potential buyers out there looking for property purchases. This is particularly true if they can find affordable loans with lower rates or take advantage of USDA-backed mortgages available to those living in rural areas and with lower incomes. As long as buyer demand remains consistent or increases further if prices begin falling; otherwise they likely remain stagnant or continue dropping.
3. Buyers are struggling.
Current US real estate market is no secret to homebuyers; with low inventory levels and sky-high prices making entry to homeownership even harder for first-timers. But Zillow recently conducted a survey which indicated that fortunes may change for buyers soon: according to this poll, a majority of real estate agents reported many prospective buyers believing the housing market will collapse soon with prices plummeting significantly - this hope can only be understood as it seems optimistic; unfortunately it likely won't.
As always, this depends on your local market. For instance, New York City's housing boom was obscured by Detroit's bust; additionally, housing markets in the West are quite distinct than in the East - national trends don't always accurately reflect what is going on locally.
Buyers in the West face an additional obstacle. Mortgage rates have seen an upward spike, making borrowing costs prohibitive and making purchasing a home difficult for those using Federal Housing Administration or Veterans Affairs loans, which require lower down payments than conventional loans.
As a result, the share of buyers who rely on these types of loans has fallen sharply; to just 26% now from 50% in 2010. First-time homebuyers also face other obstacles to entry, including rising student loan debt and high rents - these issues compound to make getting into the market difficult for first-timers.
As yet undetermined is how rising mortgage rates and price hikes will impact the real estate market across the US, but historical patterns suggest that it will likely ease rather than crash and burn. Would-be homebuyers should begin saving for down payments now, while actively searching for homes which meet their needs in desirable neighborhoods across America.
4. Rents are high.
Homebuyers have faced intense competition that drove up home prices for years. When these buyers struggled to find homes, many turned to renting instead due to high mortgage rates and rising rental costs - leaving many under financial strain as mortgage rates remain elevated and incomes struggle to cover soaring rental costs. A new report from the National Low Income Housing Coalition indicates that 10.9 million Americans paid over 30% of their incomes for housing costs last year alone - making homeownership unaffordable for many people.
While housing and real estate markets generally fluctuate with the overall economy, rising costs for two-bedroom rentals have shown no sign of decreasing. According to Redfin, rent for such an apartment in Austin jumped nearly 50% last year alone!
Experts have proposed various theories as to why rental prices remain so high despite falling inflation rates, with some attributing it to rising mortgage rates forcing would-be homeowners into renting rather than owning and/or investment firms hoarding properties and restricting supply - though neither explanation may adequately account for why rents remain high.
Housing and real estate may be experiencing a cyclical bubble; experts don't yet know when this period will come to an end. One thing experts do know, however, is that fundamentals support prices well enough that prices should continue rising for some time yet.
But if the bubble bursts, housing market may follow suit and experience a precipitous downturn - potentially leading to recession. When this occurs, mortgage and property sales could decline while housing prices may drop accordingly.
As such, consumers must remain cognizant of the risks associated with over-leveraging their real estate or other investments, and work with an experienced real estate professional when buying or selling. That way, they'll be in a better position to weather any economic storms that arise.
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