OK, we’ll admit it; here at Brick & Corbett, we’re kinda nerds when it comes to numbers, market statistics, and trying to parse out the specifics of not just what the housing market is doing, but why it’s doing it. It’s easy to get into the weeds on this and it’s also easy to forget that not everyone geeks out over this sort of thing like we do.
So, for this week’s blog, we thought we’d just step back and take a straightforward, simple look at exactly why home prices are so high right now and what we expect will happen in the future.
Home Prices are High EVERYWHERE
The fact is, we’re seeing spikes in home values across the country, not just in Northern Michigan. A recent study by the Federal Housing and Financing Agency shows that prices are up, on average, all across America.
Our midwest region is seeing, on average, growth of about 12% in the last year, which is in line with what we’re seeing in Northern Michigan.
It’s easy to think about real estate in these big terms because that’s what we see reported on the national news, but remember, these statistics are just snapshots of context; the really important information is what’s happening, regionally, locally, and on the street-level.
Your home price is likely to be more affected by what happens around the corner than what happens around the country.
The First Reason Home Prices Are So High: Inventory is Very Low
You’ve probably noticed an uptick in Realtors sending out marketing that is practically begging people to list their home for sale. Right now, the inventory levels across the country are extremely low, and this is affecting a buyer’s ability to have choices, or to even have an opportunity to make an offer in the first place.
The national statistics show that we’ve got about two and a half months of inventory available, meaning that if no other homes were listed, it would take us that amount of time to sell through our existing housing stock.
Locally, our numbers are even lower than that. By B&C’s count, the local inventory levels would only support about 45 days of buyer activity. Of course, this is going to vary depending on the sector of the market you’re dealing with ($150,000 starter homes and three million dollar mansions are very different animals), but on average, if we stopped listing homes for sale, we’d be sold through by the middle of August.
A shortage of supply is the first trigger of the supply/demand market economics move pushing prices higher.
The Second Reason Home Prices Are So High: Buyer Demand is Very High
If lower inventory levels weren’t enough, we also have high buyer demand. Many buyers, spurred on by the motivations of COVID for new space, plus historically low interest rates, are in the market with money to spend and are itching to find a new spot.
This high number of buyers is creating a very competitive environment, which, paired with the low inventory levels, is accelerating the home price movement.
The Third Reason Home Prices Are So High: Rent Isn’t Affordable For Many in Our Region
Ask anyone in Northern Michigan about current rents and you’ll likely get a story or three about how it is impossible to get an affordable lease anywhere near Traverse City, Elk Rapids, Glen Arbor, or otherwise.
To be fair, renting can’t be directly compared to owning a home. When you rent, you’re paying not just for space, but for flexibility. You’re paying for the ability to walk away from a home at the end of your lease free and clear and not be saddled with debt in the interim.
However, with the interest rates where they are right now, renting a home or an apartment often results in a higher monthly payment than you’d have to pay on a mortgage for the equivalent space, so many renters are foregoing the rental pursuit for a chance to own.
Basically, with many renters now potential buyers, we have an even more inflated buyer pool with greater demand, which, in turn, is pushing prices higher.
The Fourth Reason Home Prices Are So High: New Construction Levels Are Very Low
You may have noticed that the number of housing starts in Northern Michigan feels a little lower than normal. That’s because, on average, we’re seeing relatively little new construction.
With material costs doubling (and in some cases tripling) for much of the lumber needed to frame homes, the profit margin on new construction is shrinking, making builder-led spec homes less attractive, and making the process of owner-led construction more difficult. We’ve even seen current projects stall because of budget concerns.
Certain buyer segments are better served by new construction homes. With these homes not as available, these buyers are again pushed back into the existing home market, effectively creating a double-whammy for prices (lower inventory and higher buyer volume).
So, What’s Going to Happen With Home Prices in The Future?
Though nobody has a crystal ball, one thing that most experts agree on is that we’re not likely to see a bubble burst as we did in 2009. The current market conditions aren’t being prompted by these artificial conditions (save for perhaps the holding of interest rates so low); they are due to organic market conditions that are driving prices up and down as you’d expect.
For many of us in the real estate industry, this is a relief. Sharp corrections like the ones we saw after the 2008 mortgage crisis are hard on everyone buying and selling, so reassurance that we don’t have that sort of sudden snap in our future is good. That being said, it’s still stressful for buyers, sellers, and agents right now. A more balanced market means more people win, something we’re all striving for.
Our prediction is that housing prices are going to continue to rise through the end of this year and likely even into the middle of 2022. We’re guessing that by the middle of next year, the FED is going to normalize interest rates a bit, which is going to cause buyer demand to drop off some, which is going to cool the pricing trend upward. However, we don’t expect prices to drop, more to just level off.
Will that happen? Only time will tell!
If you have questions about your home’s worth, about the best strategy for buying a home, or about what it would feel like to sell a property in this market, Brick & Corbett is here to help. Our team of seasoned professionals has helped to buy and sell literally thousands of homes, and we can help you too. Reach out today to get started.