No sector of the economy has upended expert expectations during the pandemic the way the residential real estate market has. After taking a big dip in the spring of 2020, homebuying came roaring back that summer and hasn't slowed down since, to the delight of sellers and the dismay of buyers.
Month after month, home prices keep going up. Depending on the index, home values have increased between 25% and 33% from the end of 2019 to now. That's more than double the growth that housing prices experienced in the two-year stretch between 2017 and 2019, according to all three indexes.
"I am surprised by the longevity of it," says Zillow economist Jeff Tucker. "I describe this market as very low inventory, very fast price appreciation. It's very out of balance, and we tend to expect an economic system without a balance to return to balance."
That hasn't happened in housing. Despite all the uncertainty and all the emotional and physical upheaval Covid has created, people have kept buying property.
The current housing market is a confluence of factors, but the core drivers continue to be reduced supply and overwhelming demand, Tucker says.
"On the supply side, the flow of new listings [in December] was down pretty substantially year over year, more than it had been in the last few months," Tucker says. The number of homes for sale nationally fell below 1 million in December 2021, according to Zillow: a 40% drop from December 2019 and a historic low for the site.
December was a low point for inventory, but listings have been well below demand for two years. Bidding wars are commonplace. And despite the fierce competition, demand hasn't fallen.
"Folks who were stymied searching in the summer just kept at it," Tucker says. "That helped keep demand high by seasonal standards and at an unusually high level right through December."
There are other underlying forces that are not Covid-related and are adding to the current mix of low supply and high demand.
Many renters see buying property as a way to protect their housing budgets from inflation, as the monthly cost of housing skyrockets across the U.S. Rents rose almost 16% in December from 12 months ago, according to Zillow's national rent index.
Another underlying problem: U.S. housing stocks never fully recovered from the housing market collapse and the Great Recession more than a decade ago, Tucker says. "America really didn't build enough homes from 2007 to about 2019, and the chickens are coming home to roost now," he says.
"It turns out a few million extra people getting into a market that is a few million homes under-supplied is enough to create a very sustained imbalance of supply and demand."
Potential buyers are going to have a tough time buying their dream homes, but people in the mood to sell could make serious profit in the current housing environment.
Of the metro areas that Zillow tracks with more than 1 million residents, 13, including Austin, Texas, and Salt Lake City, had home values go up more than 25% in 2021. Another seven had home prices go up by more than 20%.
That seller's market is likely continue for the beginning of this year as the momentum from 2021 continues pushing eager buyers into the market. Still, there are serious headwinds on the horizon after the first quarter, Tucker says.
Federal Reserve, the U.S. central bank that controls interest rates, hasn't increased its rates yet, but the cost to borrow money with a mortgages has steadily been going up over the past few weeks. At the beginning of January, the average 30-year fixed rate mortgage was 3.3%, according to the Mortgage Bankers Association. Three weeks later, that average had risen to 3.7%.
That's where Tucker expected rates to be by the end of the year. "And just now in a single month, it has covered most of that ground," he says, which "brings us all the way back to where [rates] were right before the pandemic."
The spike has been swift, surprising even him, and that jump "will contribute to cooling off price appreciation this year," he says.
Despite the tough competition and high listing prices, experts say that persistent house hunters who have the financial bona fides would be wise to buy now. Every week they wait means that they will be paying more in interest. That could potentially add hundreds of dollars to their monthly mortgage payment.
Here are some expert pandemic real estate tips before you put in your bid.
- Get prequalified by your lender. There's a big difference between being preapproved and being prequalified for a mortgage, experts say. Prequalification is a much more robust look into your personal finances so the lender can make sure you're good for the money. It means that sellers will have to do less legwork if your offer is accepted.
- Have your lender call the listing agent. The most competitive buyers will not only get prequalified but will also have their lenders call the listing agent, experts say. "I always like the lender to call me and tell me about the client when they're making an offer," Jeffrey Knipe, a real estate agent and founder of Knipe Realty in Portland, Oregon, recently told Grow. "The lender can really help make your offer that much better."
- Write the seller a letter. Send the seller a personal note, experts say. It won't make the difference if someone has outbid you on price, but in particularly tight negotiations, an appeal to the seller's emotions can sometimes do the trick.
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