National Real Estate Prices Increasing 8% in 2021
There is unprecedented demand for housing, across the United States. The lack of new housing units continues to plague the US. This lack of inventory can actually be traced back to the Great Recession, during which time construction truly ground to a halt. Economists forecast that in 2022, value growth will ease off to under six percent per year. That’s still about double a normal year’s opportunity in residential real estate.
Twin Forces Pushing Real Estate Home Values
Interest rates are incredibly low. This cannot be emphasized enough. A decade ago, during The Great Recession, higher rates eliminated home buyers, even with all the incredible incentives to own in place. Low home mortgage rates are absolutely creating new home buyers daily.
Low Supply, inadequate inventory, a Seller’s Market. Whatever you call it, there do not seem to be enough homes for sale to satisfy demand.
The combination of readily available, inexpensive mortgages alongside lack of housing inventory is causing home prices to surge month to month along the Colorado Front Range.
A Millennial home buyer seeking an entry level home can expect these conditions to be prevalent in 2021.
The Risk Of A 2006 Repeat Leading To Housing Crisis
I hear this less and less from home buyers nervous about a repeat of the recession and housing crisis. I will say there are two tremendously important differences between then and now.
First, the way houses are being financed. In 2006, there was a rush into 103% financed homes with no income verification. Buyers were wrapping their closing costs into transactions and starting out upside down. Home buyers didn’t even have to truly qualify financially.
This was considered okay as values were climbing, but in retrospect, very risky.
Second, the most prevalent terms was the Adjustable Rate Mortgage – known colloquially as an ARM. These notes frequently reset at 3, 5 and 7 years. From 2006 to 2012, resetting ARM’s ratcheted up payments while values fell and we had the Great Recession.
I’m not an economist, but I do know ARM notes are far less prevalent in 2021 and the no-income verification financing has not returned. Obama-era banking regulations have lenders being more cautious. But, there is no free lunch. The caution is creating a new obstacle: appraisal gap coverage.
Appraisal Gap Coverage; The Cost Of Home Buying In 2021
Locally in the Boulder real estate home buying market it is exceedingly common for the house buying party to waive the appraisal condition. Or agree to cover a shortfall. Lenders are indeed having trouble keeping up with pricing.
An Analogy On Appraisal Vs Realtor Valuations
Think of it like this. The appraiser and the Realtor are seated side by side, in a car. The Realtor is looking forward, out the windshield, at what’s coming. The appraiser is using the rear view mirror, looking back, into the past. As the car – the market – accelerates, the gap between what the Realtor and Appraiser sees is widening.
And that causes home appraisals mandated by banks making the mortgage to come in low.
And as a result, it is more commonplace than ever for a home buyer to guarantee to bring additional cash, over and above the down payment, to cover the gap or shortfall a low appraisal can cause.
Booming Secondary Housing Markets
A cousin of mine – well, the daughter of a cousin – took an internship last summer with an RV swapping firm. It turned into a super busy summer position. Who knew that America would turn to the humble RV as the safest way to vacation in the age of the pandemic.
Similarly, good friends and past clients Kevin & Doreen were initially worried their furnished short term rental would sit empty. Au contraire. Bookings surged and for longer stays. White collar workers, suddenly working from home, realized that home could be anywhere. Why not rent a dream home in the mountains with a hot tub on the deck? It’s a great way to ride out a pandemic and you can have your groceries delivered too boot.
The ability to live anywhere and work is going to have a profound impact on housing markets in coming years. A question that has yet to be answered, goes like this. What happens to the tech worker, priced out of the close-in San Francisco housing market that can now work from home? If that continues post-pandemic, will that worker opt to stay in an expensive marketplace like SF or make a move to Boise Idaho?
You may be laughing. But Boise is hot right now. And remote workers are fleeing crowded cities with unusable amenities for the ‘burbs.
This will definitely be an interesting trend to watch in coming years.
Booming Tech Hubs
Boise has something closer to home than you might think. It shares a booming tech hub vibe with Denver. Are either of these cities a Silicon Valley heavyweight like San Francisco? No. But, each offers far more housing, and by California standards, far less expensive too boot. More so even if a technology worker is selling in California and buying in Denver.
Expect to see demand in the Boulder/Denver Front Range continue to grow as technology businesses relocate into the area.
So I Can’t Lose With Real Estate
That would be the worst thing I could say.
The truth is, the market could turn down. Overheated values could reverse, the end of the pandemic may cause a rethinking of where people want to live, how much they want housing to be a part of their cost of living. Bigger Pockets writes on why this is not the time to buy. They see low mortgage rates as the latest shiny object, something that is causing people to buy, not facilitating the transactions.
By contrast, JP Morgan sees a mostly bustling marketplace with few places as risky as Phoenix, Arizona in 2006.
My best advice from a Realtor Standpoint
- Set a budget you are comfortable with and stick to it. If you keep finding yourself losing out to high bids in compete situations, lower your price point to give yourself more bidding power. This keeps you on budget.
- Get pre-approved early in the home buying process. When the right house comes along, you want to be 100% ready to make a competitive offer.
- Start the home buying process earlier than you think you need to. It is taking longer to secure a home buying contract in this competitive market.
- Home Sellers should know, this is a great market to get top dollar and a quick sale. I can create a market analysis for you.
- Use an expert you know, like and trust. Shameless plug: I’ve been assisting family, friends and clients since 1995 in the purchase and sale of residential real estate. I know the market. I’m ready to get to work with your home needs in mind.