Did you hear about that couple who just sold their house for $200,000 under asking price? No? Neither did we.
Rather, did you hear about the couple who just sold their house for $700,000 over asking price after a week on the market and got an all-cash sale with no contingencies (and 26 other people putting in offers)? Yes – we did too. That’s just about a daily occurrence these days.
The housing market has been on a tear and has left many heads spinning and wondering what is going on. Will this continue? Is this a bubble that’s going to pop? Is now a good time to buy or to sell?
Several factors have converged to drive housing prices up – about 18% over the last year on a national average.
First, mortgage rates are at historic lows: 30-year fixed mortgages have been offered at an amazingly inexpensive rate – under 3% for some time. This very cheap borrowing translates into more people able to afford larger loans. This has led to a large increase in buyers and funds available to put towards home purchases.
Second, the Covid pandemic led a noticeable shift in housing appetites and to a lot of residential movement. Generally, there’s been a move towards more rural and suburban areas with more space and more nature. “You mean I can work from Tahoe or Napa or Nantucket or (insert ‘Zoom town’ here) have a home office and a garden? I’m in!” You may have seen the flow into or out of your neighborhood? There has also been an increase in “digital nomads” who can live and work virtually anywhere around the globe as long as they have a laptop and an internet connection.
Third, in most places, supply of new or existing homes has been constrained. This has manifested mainly in how briefly homes are available – they are on the market for a median of just 9 days in California. That said, actual inventory has also been low. Whereas there is commonly enough inventory to satisfy several months of demand for homes, that number has dropped to just under 2 months of supply (that is, if no more homes came on the market, the supply would be purchased in under two months). On the building side, demand for builders and limits in construction supplies and labor have led to low new inventory of homes (and high building costs). Adding to this constraint is the appetite that institutional investors have for the diversification and returns that the single-family home asset class offers.
Fourth, human psychology naturally plays a role. Remember toilet paper and sanitizer hoarding? When something is in limited supply (real or perceived), that tends to create a more urgent demand for it, further increasing its desirability and price. The constant stream of stories about how limited and competitive the housing market is has led to demand and emotionally fueled buying as well.
Fifth, this all happened to coincide with a time of general prosperity. The stock market drop of March 2020 was regained in record time. The unemployment surge was also quite quickly taken back into the work force (while still leaving many industries desperate for workers). There’s generally been money available for home purchases and that has created a market of many more competitive bidders.
Put this all together: Limited inventory, exceptionally high demand, easy and plentiful money and a covid-fueled appetite for a change of scene – the natural outcome is that competitive bidders need to outbid each other to win their new home. Sellers are incentivized to let buyers offer the highest price and easiest terms. And…prices go up.
What could lead to a huge change in supply and demand? A psychological shift in which buyers tire of the emotional roller coaster ride of trying to buy a home while sellers, sensing a peak in the market, rush to sell and flood the supply. Perhaps this could coincide with unexpectedly higher interest rates and falling portfolio values? Even then, it seems more likely we’ll see a cooling in the market rather than a popping bubble.
In any case, signs do show some cooling in the real estate market. The percentage of sale going for over asking, and the amount over asking is decreasing. Sales numbers in CA have been slowing (though mainly in the lower-priced parts of the market). Lumber prices are coming way down. But home prices (and prices per square foot) continue to rise.
How should you think about your personal situation?
If you own your home and plan to stay in it forever, then this is just one interesting year among many in the passage of time in your home ownership. The change in value of your home has little impact on your daily ability to lead your life and thus isn’t something to spend too much time excited about or fretting over. It feels nice to have your net worth increased by this market, but without any plans to sell, it’s not too relevant. It’s just a nice strengthening of your finances.
If you are planning to sell your home, it may be exciting to think of the great price you may get. And it’s likely a fine time to be selling. That said, if you need those home sale proceeds to buy a replacement home, then you are likely to also be paying a high price for your new home and thus these may offset each other. The exception is if you happen to be selling in a higher-priced market and buying in a lower-priced one – you may reap a nice windfall from that. The opposite is also true – selling in a low-demand market to buy in a high-demand one may be challenging.
What if you are a buyer (and not a seller)? Should you buy now or wait? It’s impossible to know if prices a year or two years from now are going to be better. You must weigh what you know (current prices and the competitive environment) with accepting the range of possible outcomes in the future which might see higher or lower prices. The consensus we see is that the market should continue to remain strong for some time.
And I think that it helps to remember that, to the extent you plan to live in a home for decades, it may take pressure off making sure you get the best price. Sometimes it’s more important to get the home that you most want. Over the years, you may experience a lower rate of return on your home investment by “overpaying”, but that may be acceptable to you.
All that said, if you have the flexibility, it’s generally preferable to be a seller in a hot market and buyer in a cooler market.
We’re always here and happy to help you think through your own real estate planning and the role of
your home in your finances. And if you haven’t refinanced recently, it could be worth a look. We
can help you evaluate that.
What happened in the markets in the 3rd Quarter?
It was relatively uneventful with most U.S. and foreign stocks down a bit and emerging markets,
dragged down by China and Brazil, having pulled back about 8%. Overall, portfolios were anywhere
from flat to down a percent or two. Year-to-date results still look strong.
We wish you an excellent entry into the fall season and hope this finds you in high spirits.
