By Trace Dixon
The Housing Market is currently as hot as the temperatures outside, which is an impressive feat to say the least. While that is great news for home sellers, people who are trying to buy homes are wincing at the soaring prices and limited availability. You could almost say it’s the opposite of 2008: instead of houses being everywhere for rock bottom prices, houses for sale are a rare sight that sell fast and high. But what’s causing real estate to balloon?
You can boil everything down to a handful of reasons. To start, the supply of houses is limited but the demand is still high. You remember supply and demand curves from economics, right? Maybe you overheard some mention of them while you were working on your afternoon power nap in class, as not all of us had discovered the liquid energy we call coffee in that stage of our life
Supply and Demand though work together, with supply showing how much of a “thing” is available and demand showing how much people want said “thing”. The point at which there these two ideas meet we call the equilibrium. It’s a place which at a certain price, the right amount of an item can be sold to satisfy both supply and demand. So, if the supply of houses is down but people still need to and want to buy them, what happens to the market? Generally, we build more houses to put things back into balance.
The problem is there is not enough new construction to balance the demand, which leads to higher prices in order to keep the balance. COVID-19 has caused massive supply chain issues and shortages around the world in every corner of the market. When it comes to houses, from mid-2020 to early-2021 very few were being made due to safety reasons and the market for houses coming to a screeching halt. Now that the market is drifting back into a more normal state, getting the construction engine started again and running at full strength is going to take some time. Labor shortages and supply chain stoppages will eventually work themselves out, but that requires time and patience. Those may be traits you want to see you kids or grandkids display, but rarely do we as a society want our progress to be slow and plodding like the Tortoise from the Tortoise and the Hare.
So, with low supply and high demand the only way to balance the market is to raise prices. But in order to ease the burden and keep demand from dying off completely, mortgage rates have been placed at all time lows to make money cheap. When mortgage rates are lower, people tend to buy more expensive houses because they can pay the same rate they would pay for a higher interest rate with more going to the principle.
Put simply, you might be willing to pay $1000 a month for a house with an overall average $250 of that amount normally going towards interest. But with a lower interest rate you can still pay $1000 a month but have on average only $100 of that amount going towards interest. So with $150 extra dollars per month going towards buying the actual house and assuming a 30 year mortgage you could now afford a house $54,000 more expensive at the lower rate.
So as houses become more expensive due to the state of the market the low mortgage rates keep those higher prices feasible, which is good in the sense that it is still possible to buy a house, but also bad in terms of not offering a way for prices to come down from their sub-orbital prices. You can now afford to pay an additional $54,000, the only problem is the house you’re buying a few months ago cost $54,000 less than what you are paying for it, so we inevitably feel like we’re not getting a good deal out of the situation.
The good news is that as we move on further and further from the COVID-19 shutdown, barring no further closures the markets will begin to fix themselves. Like traffic on the interstate, it is only going to take time to resolve now that things are getting cleaned up and reopened. If you have any further questions or concerns, reach out to us and see what steps can be taken to help bring you peace of mind during this rollercoaster of a market.