Let’s be honest, the housing market isn’t only on fire, it’s insane. Many of our clients and friends have recently sold homes in a matter of days and for some it was just a few hours. The average home price in the U.S. has increased by nearly 5% from a year ago which is helping to fuel the frenzy. Homes are being sold above asking price without even requiring inspections. A little euphoric? Maybe, maybe not. Let’s look at the facts as to why this market is the way it is.
- Cheapest mortgage rates in history: Mortgage rates ticked below 3% for the first time since they first started being tracked in 1971. That’s resulting in an average savings of $100-$300 a month for refinancers. “A $340,000 home would have cost about $1,260 a month a year ago when the typical mortgage rate was 3.75 percent. Today it costs $1,140.” Mortgage loan applications recently hit their highest level since 2008. Do you remember what happened right after?
- Low supply of homes: The inventory for homes fell 27.4% in June compared to a year earlier. New home builders are seeing strong demand, but they can’t keep up as the supply chains are strained due to the pandemic. Home buyers have no choice but to either wait until these homes are built or look at existing homes for sale.
- Rush to the suburbs: Mostly driven by Millennials who are well into their 30s and starting to have children. The average age of the first-time homebuyer is 33-34 years old. These individuals are looking for a yard and more space as opposed to the cramped city life they enjoyed. I can’t say I blame them when you consider the areas hit hardest by Covid. Densely populated areas can become breeding grounds for airborne viruses. When telecommuting and virtual offices become the norm, the daily “commute” becomes a moot point. A friend of mine recently complained about having to work from his basement apartment in the city. He said he won’t be going back to the office until 2021 at the earliest. He is contemplating moving out of the city into the suburbs. Another subtle change is the “retiree” who once desired the city life in their later years now opting to remain in their existing homes. The general idea of downsizing has hit the pause button for now.
While this summer has been great for homeowners, it has not been so great for renters. Low income families have been hit the hardest during Covid. Many have lost their jobs due to the pandemic and finding alternatives has been difficult. Unemployment is currently sitting above 10%. Low income families usually rent their homes which hasn’t allowed them to benefit from these low mortgage rates. Many banks increased their borrowing standards at the beginning of Covid which has prevented anyone with not so great credit from obtaining a home loan. Even worse, the no eviction policy put into place by Congress was lifted on Aug 1st. The extra $600/week unemployment check also stopped on Aug 1st. Stout Risius Ross, Inc., a consulting and investment banking firm, predicts nearly 12 million eviction filings by October. Congress is currently working on extending unemployment benefits for those individuals who lost their job due to the Pandemic. It will be interesting to see if Congress can come to an agreement on providing more unemployment relief in the near-term.