Current Housing Market Explained

tahosemann
Apr 12, 2021
3 min read

Okay, we all know that the Real Estate Market is currently a little out of control. You probably hear all the time from real estate agents "housing inventory is so low, sell now to make top dollar!" or maybe "interest rates are so low, now's the time to buy!" And while those things are true, you probably question it and wonder.... why, how, and what does this mean? I'm going to explain to the best of my knowledge what this current market is like and why it is the way it is.

Over the past few months, we have seen housing inventory become the lowest in history!

Housing inventory = amount of homes that are actively for sale.

To put in perspective.. 40% lower than this time last year. (ALMOST HALF)

Home prices have risen the fastest they have in the past 15 years. National housing prices are up 11% from last year, which means some areas are experiencing even higher prices.

Why is this, you ask?

Well, in March 2020 when everything shut down for COVID-19 precautions, there was the immediate concern that everyone would lose their jobs, therefore, stop spending their money, stop paying back their loans, and essentially default on their loans. So in return, interest rates were lowered to incentivize people to borrow, spend, and lend more money to help people stay afloat. Then, The CARES Act was passed to allow people to basically pause their mortgage payments without the risk of foreclosure. And the thought from all of this was...we just need to get through the next year of COVID-19 and everything will be okay and eventually even out.

But... no. As a result of lower interest rates, nearly all investments have skyrocketed in value. The stock market is at the highest its ever been, luxury cars are being bought like crazy, and real estate...well...let's just say it's the hottest it's ever been.

Lower interest rates have made real estate more affordable to purchase. As buyers get approved for a larger loan with a lower payment, this raises the demand for houses as more buyers enter the market, paired with the extremely low inventory, resulting in home prices rising.

High demand + Low inventory = more competition = increase in home values.

I hear from a lot of people that they are concerned there will be another foreclosure crisis similar to the one in 2008, because of all the people who have gone into forbearance and put their mortgage payments on hold. Currently there are about 2.5 million homeowners who are in forbearance. And the number has been steadily decreasing over the last 9 months. This is a sign that either homeowners are getting back on their feet, or homeowners just went into forbearance as a precaution in case they did experience financial hardship due to COVID-19.

As the demand to buy a home rose, this pushed up homeowner equity about $26,000 across the US. Chances are if you own a home, you've made a lot of money in it the past year, and the chances on people foreclosing is slim. Only homes with negative equity can foreclose. Currently, only about 2.8% of all properties with a mortgage are "underwater" (underwater = have negative equity in their home, creating risk of foreclosure) and we are seeing this number steadily decrease. So as these people come out of forbearance, one of 2 things can happen:

People who still cannot afford their mortgage payment will sell, collect their equity, and move on.
People who chose to go into forbearance just as a precaution will simply just continue paying their mortgage payment.

In 2008, 25% of homes were underwater. In 2021, that number is only 2.8%, and like I said, steadily dropping.

So, here's the facts and the summary:

Interest rates are still historically low.
Housing inventory is still historically low.
Homeowners have more equity in their homes than ever before.
Banks are only lending to the most qualified buyers.
The surge of demand from buyers due to lower interest rates is the perfect storm to push home prices up.

I'd say the housing market will eventually slow down, but at a gradual speed, where things can catch up and adjust, and we are not even close to being in a comparable situation to 2008.

I hope this was helpful and explains the market in a clear way and helps you create your own hypothesis as to what's to come! While we all can't predict the future, we can use facts and data to stay educated, and make smart financial moves for the future.

xx,

Taylor