Are we in a Real Estate Bubble?
Trying to buy a home right now often comes with stress, bidding wars, and a hopeless feeling that you will never buy a home. With homes getting multiple offers above asking price within hours of being listed, it is an extreme seller’s market. That has created a real estate boom across the country. There is no need to look further than Indiana, as median house prices increased by a whopping 17% between February 2020 and February 2021, according to the Mid-Indiana Board of Realtors. This real estate boom is a classic story of supply and demand caused by the many factors described below.
Demand: The past 12 months have seen 30-year mortgage rates near and even below 3.0% for the first time ever. Low interest rates allow for cheaper monthly mortgage payments, which in turn allow Americans to purchase more expensive homes. For example, a 4.0% interest rate on a $300,000 mortgage is about the same monthly payment as a $350,000 mortgage at 3.0%.
The pandemic has not slowed down the housing market; rather, it has added fuel to the fire. Some families realized their new lifestyles and habits have changed what they need and want out of their home. Spending more time than normal in their houses has led to wanting more square footage, a bigger playroom, outdoor space, etc… In addition, many employees foresee continuing to work out of their house into 2022 and beyond, creating a need for a new or bigger home office. More times than not, the only way to address those issues is to move.
On top of that, Indianapolis and its surrounding areas is one of the best markets in the country where rental property investors can still make good money. Institutional investment money has been flocking to the Indianapolis area, as there is relative rental property value compared to other cities around America. These investors are difficult to complete against as they make all-cash offers, conduct virtual inspections, and move to close quickly. On top of competing against 10+ offers, individual homebuyers now must also compete against these large rental investors.
According to the National Association of Realtors, the Indianapolis area is one of the top 10 metropolitan areas in the country for growth during the pandemic. That growth is expected to continue in both 2021 and 2022.
This demand is not expected to dry up soon. One factor making this demand steady and sustainable is that Millennials and Gen-Z will continue to purchase their first home. Of the 140 million people that comprise Millennials and Gen-Z, only 50% currently are homeowners. That percentage is much lower than Baby Boomers at 77% and the Silent Generation at 78%. Therefore, Millennials and Gen-Z should continue to add strength on the demand side of buying homes in the future.
Supply: There is currently a severe housing shortage in America. There are just not enough homes for sale to go around. “Months of inventory” is a measure of how many months it would take to sell all existing homes for sale currently on the market, and a balanced inventory market is estimated to be about 6 months’ supply. Currently, the inventory is less than one month supply and, in some areas or specific price points, there is less than .2 months’ supply. The supply side can be slow to increase. New construction is not quick, and builders are currently backlogged and struggling to keep up with demand.
The imbalance between supply and demand has caused home prices to increase drastically over the past few years. It is expected that the housing boom will continue, although it’s most likely that home appreciation will be lower than the current rates we see today.
This real estate market is vastly different from the last boom that led to the Great Recession in the early 2000s. At that time, lending standards were extremely poor, and families had mortgages they could not afford, in some cases interest-only. Currently, mortgage standards are high, and American households are sitting on record levels of cash and low levels of debt. In general, homeowners’ finances are nothing like they were in the early 2000s. Over the next few years, demand should slow down, and supply should eventually pick up. That will stabilize prices more in line with the historical average of about 3.0% rather than the 17% we saw last year, and the projected 7% - 8% we currently see and expect to continue in 2021.
Please reach out to me with any questions or to discuss further.
Evan Werckenthien, CFP
317-587-0858
Evan@EWwealth.com
600 E. Carmel Drive Suite 130
Carmel IN 46032
Sources:
https://ycharts.com/indicators/30_year_mortgage_rate
https://www.forbes.com/sites/andrewdepietro/2020/12/15/top-housing-markets-to-watch-in-2021/?sh=1e5980046c79
https://www.usatoday.com/in-depth/money/2021/02/04/homes-sale-we-housing-bubble-prices-outstrip-wages/6671282002/
https://www.nar.realtor/reports/top-ten-markets-during-covid.
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