Based on dozens of conversations I have had recently, many clients are surprised about the rapidly rising costs of real estate considering we are 12 months into a pandemic that caused significant economic turmoil and unprecedented fiscal stimulus. I understand people feeling that it is unusual to have a recession and a housing boom at the same time, but our current circumstances are very unusual and have created a bit of a perfect storm for housing prices.
1) Space – I do not think there has been a time in modern history where people value space, both indoor space in their home, and outdoor space in their yard, more than right now. An airborne pandemic is going to decrease the desire for a trendy apartment in a great city location and increase the desire for a standalone house with a yard.
2) Retirees not selling at the usual pace – Many folks in their 60s, 70s, and 80s who were planning to either sell their home and downsize to a condo or sell their home and move to a retirement community postponed that decision in 2020. This is tied in with #1 above. They did not want to give up the safety and the space of living on their own.
3) Source material costs for newly built homes – For several reasons, the costs of common components of new home construction (lumber, copper, crude oil, granite, insulation, etc) are at or near all-time highs1. Some of this is due to the COVID shutdowns in 2020 and some of it is due to higher than expected demand, but anyone who has had a remodel project quoted to them in the past few months has probably been a bit shocked at the cost. Some of that high price is due to the rise in cost of the raw materials. This affects remodel projects, but it has an even greater impact on the cost of newly constructed houses.
4) Interest rates – Due to economic conditions and the Federal Reserve’s policy, mortgage interest rates have plunged to almost unimaginable lows during the COVID crisis. The ability of some consumers to lock in a 30 year fixed rate mortgage below 3% is still a bit mind boggling to me. However, while low interest rates are good for buyers who plan to own the home for a very long time, low interest rates often drive up the sale price of the home. The reason is that many people decide whether they can afford a home based on the monthly payment of the mortgage, not the price of the home. At the end of 2020 you could buy a $750,000 mortgage for approximately the same monthly payment as a $480,000 mortgage would have cost you in July 20072. I understand a buyer being excited about low interest rates, but we cannot forget this is part of the reason the housing prices have gone up so much and that low interest rates benefit long-term home buyers much more than someone who is only going to own the home for a few years.
5) Demographics – If COVID had never happened and we did not have the four points above occurring, a good argument can be made that housing prices would still be escalating. More so than generations before, millennials delayed the purchase of homes. Partly due to location preference, partly due to entering the job market during or closely after the Great Recession, partly due to having kids at an older age than prior generations.
My intention when I sat down to write this article was to give some context to what many of my clients are seeing around them. It is unusual to see a bunch of houses show up on RedFin or Zillow and then be switched to “pending” within a day or two. It is unusual for houses to be purchased for tens of thousands of dollars over asking price.
However, I cannot stress this next statement enough. You should not buy a home simply because you are concerned that prices will continue to rise at their current pace indefinitely. You should make the renting vs buying decision based on your personal financial circumstances which include the stability of your job, the length of time you plan to stay in the area, the school districts (if you have or will soon have school age kids), and a few other factors. Low interest rates or fear that houses will keep getting significantly more expensive each year is not a good reason to make a rushed decision.
1 - Wall Street Jornal. 3/17/21. New Houses are Costing More as Prices Jump for Wood, Bricks
2 - Freddie Max. 30 year fixed rate mortgages since 1971
Financial Professionals do not provide tax, legal or real estate advice, and this should not be considered as such. Please consult with a tax, legal or real estate professional for advice regarding your specific situation.