The Fantasy of Home Ownership
Authored by Tareen Kaza
Owning a home may be a dream for the Gen-Z generation as Millennials are barely able to keep up with the prices of homes skyrocketing. Home prices have eerily soared in a similar pattern to what occurred prior to the financial crisis of 2008. The American Action Forum notes a trend in 2021 that is far different than the years before, “Between 2014 and 2020 the United States saw a steady increase in house prices of roughly five percent each month when compared to that same month the year before.” However, in 2021, the house prices have increased from about 12-16%. Why the drastic change in 2021? The Covid-19 pandemic can be credited to this.
Median Sales Price of Houses Sold for the United States
The trend of working from home has exacerbated this demand. Remote work as well as a social distancing precaution has inspired a stress for homes in the suburbs. Another reason for the demand of homes is low mortgage rates. Unprecedented low mortgage rates have caused a huge demand for housing. The Times stated that “Mortgage and refinance rates have been hovering near 3% for several months, which is low compared to historical mortgage rates.” This is great for current homeowners as they are empowered to refinance their home at a decreased rate than before. One would expect this to be great news for prospective homeowners, yet homebuyers are facing much difficulty on purchasing a home.
The housing supply has not adjusted for this increase in demand. The pandemic has caused a housing shortage due to the high cost of construction as well as a decrease in the labor. Another negative impact to the housing supply is the cost of materials. The burst in lumber prices have added about “$36,000 to the cost of building a new home.” The National Association of Realtors declared that “the inventory of homes for sale in January 2021 fell nearly 26 percent compared with January 2020.” Hopeful homebuyers are noticing this rise in home prices and are at a loss of what their next step should be. The online brokerage Redfin Corp noted that about “72 houses in metro Austin have sold for $300,000 or more above their asking price in 2021.”
Many are optimistic that this could be the peak to the overwhelming rise in prices, but Edward Pinto from the American Enterprise Institute, disagrees stating that “prices will rise about 10% in 2022.” With this information one would expect that the sale of homes may decrease due to the increase in cost. Cost is a formidable barrier; wages haven’t increased enough to accommodate a purchase of a home. However, this can be overcome with the low mortgage rates. Homes will continue to sell rapidly because of the rise in demand and the constricted housing supply will support the inflated price of a home. This situation creates a seller’s market, with buyers at each other’s throat outbidding the other. Few will have the privilege of making it out on the other side with a new home. An additional barrier is the competitiveness of being approved for a mortgage loan. The market will continue to favor home sellers and the pandemic will continue to heighten that.
The pandemic is far from over with the introduction of the Delta variant. Labor markets will continue to be affected, impacting the supply of houses, forecasting a continuous rise in home prices. The Federal Reserve’s data shows that the median sales price of homes sold in the US is rising and won’t be stopping any time soon. The conditions for owning a home are tough and getting more perilous with each passing year. Homebuyers can prepare by meticulously saving and getting preapproved for a mortgage loan prior to even starting the hunt for their future home, but the data shows this may not be enough.