With home prices rapidly escalating, not just here in Ventura County but across the country, there is a great deal of discussion, tempered with some concern, about where the real estate market is heading. Probably the hottest topic of conversation in today’s real estate market is the lack of inventory to sell. But even as there appears to be some movement toward a more “normal” market, we are still a very long way from being there. So, while some sellers may be thinking the party could be coming to a close for them, all indicators are they will remain in the driver’s seat for the foreseeable future.
On the other hand, what about the buyers? There are more buyers than homes for sale right now, causing buyer angst, frustration, and fatigue. Bidding wars in an auction-like atmosphere have them concerned about two things, among many others. First, are they ever going to be able to get an offer accepted, and second, if they do, are they at risk of getting trapped in a home because they overpaid?
The concern about overpaying in a seller’s market brings me to another point. What about escalating home prices? At what point do buyers have to be concerned about how much they are paying? I have addressed this topic in previous blogs focusing primarily on the crash in 2008. My main point previously has been that we are talking about apples and oranges compared to that time.
At the risk of being redundant here, 2008 was not a real estate crisis. It was a Wall Street crisis facilitated by lending practices that allowed what would be ordinarily unqualified buyers to get into the housing market only to fail. These lending practices created unusually high demand, resulting in a “housing bubble” that burst when new homeowners could not keep making their mortgage payments. While this explanation is incomplete, it is safe to say that today’s market is being fueled primarily by good, old-fashioned rules of supply and demand. There are not enough houses for sale to satisfy buyer demand. Yes, in today’s market, the pandemic stalled things for over a year, impacting everything, but that appears to be only a piece of the bigger story. Relevant to today’s story is what happened to housing inventory after the 2008 crash.
According to Sam Khater, VP and Chief Economist at Freddie Mac:
“The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes.”
Historically, builders complete about 1.5 million new housing units per year. However, since the housing bubble of 2008, the construction of new homes has fallen off. Data from a recent report provided by the National Association of Realtors (NAR) reveals that new home construction has lagged behind the norm for a long time. Their data indicates that new construction ramped up to meet heavy buyer demand preceding the 2008 crash, leaving a glut of homes on the market after the crash. As a result of that excess, and coupled with a devastated economy, by 2010, there were fewer than a half-million homes built per year. And it was not until 2012 did that number begin to increase. Only now, in 2021, has new home construction come close to the 1.5 million average, creating an enormous shortage of homes to sell. The NAR report elaborates on the impact of this below-average pace of construction, saying:
“. . . the underbuilding gap in the U.S. totaled more than 5.5 million housing units in the last 20 years.”
“ Looking ahead, in order to fill an underbuilding gap of approximately 5.5 million housing units during the next ten years while accounting for historical growth, new construction would need to accelerate to a pace that is well above the current trend, to more than 2 million housing units per year….”
This means that even if new home construction increases from the standard of 1.5 million new homes per year to 2 million per year, it will take a decade to catch up.
So, does this mean this crazy seller’s market is here to stay? The good news is that we are already starting to see an increase in new home construction, but new home building alone cannot bridge the supply gap we are facing right now. In the State of the Nation’s Housing 2021 Report, the Joint Center for Housing Studies of Harvard University (JCHS) says: “To meet today’s strong demand, more existing single-family homes must come on the market.” While there are early indicators that more existing home inventory is on the way, sellers need not be alarmed that they have missed their opportunity to take advantage of this lack of supply.
And then, what does this mean for buyers? Well, we already know that buyers have been fighting their way through the auction-like atmosphere of this seller’s market—many missing on multiple attempts to get their offers accepted. Some may now be priced out of the market, while others have become frustrated and “bailed out.” And, as home prices continue to rise, some are now wavering out of concern of a potential bubble.
To our buyers, the message is: Hang in there. If you have missed out on a few offers, chances are you are up against the same set of people you’ve been competing against all along. It’s only to your advantage if some of them drop off out of fatigue or are out because they outbid you on a previous offer.
But what about value? What about buying a property in a potential bubble? That is a risk, but from our perspective, highly unlikely. We do a lot of research, and we cannot find anyone who says the housing market will crash. On the contrary, it would appear that under the best of circumstances, it will take some time for inventory to catch up. And even if it “bubbles” a bit and prices dip, they are not going to drop off the table like in 2008. Lending practices are not what they were, and banks do not appear to be willing to foreclose before offering buyers options. All of this means we will have a supply shortage for a while, and that will hold prices up. We would say that rather than planning to stay in your home for 2-3 years, you may want to think in terms of 3-5 years.
If that doesn’t sound comforting, consider this. Even those who bought in 2006-2008 and survived the economic crash are back in an equity position today. And that was a financial crash of historic proportions. Our take is if you can commit to 3-5 years, you will be in at today’s low-interest rates, and you will have equity in your home regardless of what comes next.