“There has never been a housing market quite like this before,” starts a recent article on Realtor.com, describing the current US real estate market. At the moment, first-time buyers face increasing difficulties to purchase as they are outbid by investors or simply cannot find a suitable home on the market.
As a result of this frenzied activity, house prices continue to escalate. For instance, in Florida, they skyrocketed by 20.3% in the year to July and much of the country saw similar price hikes. And meanwhile, sellers are enjoying one of the best scenarios ever. But, how long will this situation last?
The backstory to the current US real estate market
Realtor.com points out that much of the ingredients in the current market have their source in the pandemic. Real estate in many countries in the world is enjoying a heyday on the back of unprecedented demand caused by buyers keen to upgrade their homes.
The US is no exception. However, the pre-pandemic market was already suffering from some of its current woes. For example, inventory levels in Florida have been well below 6 months’ supply for several years and prices have been following a steady upward trajectory since the last recession.
“The pandemic certainly made things significantly worse,” said Ali Wolf, Chief Economist at Zonda, “but the lack of inventory has been a long-standing challenge in the housing market.”
Future price trends
One of the main problems buyers face in the current market is rising prices. Realtor.com figures show that they have risen by 13.5% since March 2020, considerably ahead of inflation and average wage increases. “Home prices have grown notably this year,” commented Realtor.com Chief Economist, Danielle Hale, “and that’s making homes less affordable”.
However, there are signs that price growth is slowing. In August, the national increase was below double digits for the first time since July 2020. Hale believes that prices will start to stall simply because “there won’t be enough buyers who can afford to become homeowners”. This scenario is more probable if mortgage interest rates rise.
Future inventory levels
Lack of supply always drives house prices up and rock-bottom inventory levels are responsible for the current spiralling prices on the US real estate market. More sellers have started to put their homes on the market in the last few months, but stock remains at critically low levels. For example, in Florida this summer, the supply of single-family homes stood at 1.2 months.
The autumn, usually one of the quieter times on the market, shows no sign of improvement in terms of demand or supply. And the situation is unlikely to get better over the next few months. “Even though more people are expected to list their homes, the market is so out of whack, the total number of homes for sale will remain low,” said Hale.
Likely new home construction
Housing construction provides one of the solutions to the lack of inventory, although here, too, the US real estate market faces problems. Despite the rise in new homes, supply remains low and unable to keep up with demand.
According to the National Association of Home Builders, the housing deficit in the US stands at around 1 million units. To satisfy current demand, the US needs to build 1.4 million single-family homes a year. However, labour shortages and lack of land are curtailing construction and as a result, the sector is failing to keep up with demand.
Solutions for a return to normality
Many would-be homebuyers have turned to rental properties, also experiencing a surge in demand. As a result, rental rates have soared – the latest data from Realtor.com showed that the average rent in the 50 largest metros in the US went up by 11.4% in the year to August to US$1,575.
But above all, the solution lies in time with buyers now forced to sit out the frenzy and wait for market conditions to calm down. However, normality will not return quickly – on the contrary, analysts believe that it will be at least three years before inventory levels even out and supply finally catches up with demand.
Meanwhile, the US real estate market probably has the best conditions ever for buy-to-let and build-for-rent investment.
(Source: Realtor.com)
