It’s the first day of the workweek and today has played out exactly like the fourteen Mondays that have preceded it. Today was the day that offers were due on a property that my team and I listed for sale last week. Buyers’ agents had until noon to submit their best offer. Our transaction coordinator, Yvonne, spent the next two hours reviewing each contract and then created a spreadsheet so that, mid-afternoon, I could present the bounty to our sellers. There were fourteen contracts submitted and the winning bid came in eighty-five thousand dollars over our list price. Stated differently, the winning bid came in thirty-four percent over our asking price. Just one more example of that which everyone has seen, read, discussed, and experienced during this year’s real estate market.
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A lack of inventory has caused real estate valuations to dramatically increase. In the first quarter of this year, property values in Monroe County increased 14.4% over the first quarter of last year. Nationally, there was a 17% increase in the value of single-family homes between April of last year and April of this year. Such increases have given rise to the question that is more and more frequently uttered, “Will there be a correction?” The short answer is, “No” and there are some very fundamental reasons as to why I think that the inflated home prices that we’re experiencing are here to stay.
- Most significantly, there simply aren’t enough homes available for sale. This is a phenomenon that has been quietly playing out for the past five years. In part, this is due to the fact that Americans aren’t moving as often or as frequently. The average US homeowner used to move every five to seven years. Today, we remain in our primary residence for twelve years. Many homeowners were further dissuaded from selling as a result of COVID-related renovations made to their homes in the past fifteen months. New offices and playrooms for the kids, new patios, and inground pools- why would somebody who has just made these renovations suddenly want to list their home for sale?
- In addition to fewer homes being available for sale, the cost of building has risen significantly in the past fifteen months. It now costs $37,000 more to build a home than it did fifteen months ago. COVID-related supply chain issues and faulty planning on the part of homebuilders associations have contributed to the added expense.
- Unlike 2008 when a pulse and thirty-seven bucks assured that you would be approved for a mortgage, today’s underwriting guidelines are much more stringent. Banks are no longer offering the “no-doc” and “low doc” loans that were a large reason for the housing crisis. Additionally, banks are no approving mortgages at 105% of the value of the property that is being used to secure the loan. Standard lending practices are now the norm and lending institutions are now approving loans at no more than 95% of a property’s value.
- Finally, speculators were frequent and common players in the real estate market that ultimately led to the Great Recession. They would buy a property with little money down, pocket the rent that they were collecting, and ignore the mortgage payments that came due every month. Eventually, the bank would foreclose but, by the time that they did, the investor would have disappeared into the ether. I’ve seen very few speculators vying to purchase single-family homes in this market. When investors are entering the market, they’re there to purchase multi-family homes knowing that banks are going to require a minimum of 20% down.
Fewer homes available for sale, rising construction costs, more stringent lending practices, and fewer speculators mean that, despite skyrocketing housing valuations, we’re experiencing a real estate market far more stable than that which we endured in 2008. The real problem, as I see it, is the need to figure out how to quickly create more housing stock and, most importantly, how to build new homes for first-time, entry-level buyers. Until federal, state, and local governments begin to focus on this as an issue of great importance, I believe that we’re going to continue to see housing shortages and, with them, the myriad of problems that such shortages create.