It is fair to say that the state of the real estate market is not the craziest story of the past year (or two). However, if you talk to anyone who has bought or sold a house in that time, the ups and downs of that adventure are probably one of the top five craziest things to happen to them in 2020-21.

I used to get asked, “So, how’s the real estate market?” And I still do get that question a lot. But by now, everyone knows home prices have shot up, inventory has been at historic lows for an unprecedented stretch of time, and stories abound of multiple offers, escalation clauses and waived contingencies. Recently, a new question has come to the fore: “How did the real estate market get so crazy?”

A complex question with many variables and opinions. I’ll share here a few of my thoughts. (Most/none of which are uniquely my own.):
Too Few Homes—During the recession, many builders (locally and nationally) ended up holding homes they had built based on the demand of the mid-2000s. When the economy went upside down, so did many construction companies, because they had overbuilt and couldn’t sell. This led to a correction (read: overcorrection) in the market, and for 10 years we, as a nation, have built fewer homes than we need to keep pace with population growth. 

One example should make the point—the number of new construction “starts” by decade. In the 1980s, 9.9 million new starts; in the 1990s, 11.0 million; in the 2000s, 12.3 million; in the 2010s, 6.8 million. Consider that during that same decade the population grew by 20 million people, or 10 million new households.*

More Renters—Another important factor is the increase in rental units and renters. Rent rates have increased dramatically, leading more and more investors to gobble up what would have been potential owner-occupied homes. Layer onto that the dramatic rise in Short Term Rentals (STRs), and even more homes move from the owner column to the investor side, making finding a home ever more difficult for those who actually want to live in one.

The number of renters grew by 9.1% in the 2010s and the percentage of the population that rents grew to 34%, the highest percentage since the 1960s.** And with the pace of today’s real estate market, more and more sellers are “cashing out” the equity in their homes while the market is hot, and going back to renting until things cool down—further saturating the market with new “tenants,” particularly those who can afford higher rates. 

Affordability—The marked rise in rent rates, combined with a prolonged period of low interest rates, makes owning more affordable in most metro areas—in many cases much more affordable. Consider that the average rate for a 30-year fixed rate mortgage has been under 3.5% since June 2020, and has dipped to 3% or less twice in that time.***

We’ll use a fictional rental property as an example. A nice 3-bed/3-bath home in Forest/Bedford County, 1800 square feet and built before 2000… that may run anywhere from $250-$300k. We’ll use $275,000 for this example. With no downpayment and estimating taxes and insurance, that home will cost a home buyer $1350-$1400/month. Depending on condition and amenities, that same home could rent for upwards of $1700/month or more.

Seller Sentiment—If you own your home and have even considered the prospect of selling in the past 24 months, surely the second thought you had was, “If I sell, where will I go?” The truth is, the pendulum has swung to the apex of the seller side, which means any seller who intends to then become a buyer is likely to be caught in the middle. Sure, some sellers will realize huge gains in more expensive markets and are comfortable paying a premium if they are moving to a less expensive area. But for most home owners—especially those who are fond of their homes—the excitement of selling is more than offset by the fear of having to buy. And this has kept many homes off the market at precisely the time we need them most. 

Will all this change? Of course it will. How long will it take? That’s a tough one. Given the above factors (and many others), it certainly won’t be quick, that’s for sure.

*eyeonhousing.org/2020/01/a-decade-of-home-building-the-long-recovery-of-the-2010s/
**rentalhousingjournal.com/the-rental-housing-decade-12-trends-from-2010-to-2020/
***time.com/nextadvisor/mortgages/mortgage-rates-history/

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