It was another record-breaking month for the housing market, but sales have begun to slow.
March was another record-busting month for the U.S. real estate market, though sales have begun to slow in the face of a housing shortage, according to a report Thursday from the National Association of Realtors.
The median sales price for existing homes was $329,100 in March, the highest on record and a 17.2% jump compared to the same time last year, the data showed. All four U.S. regions posted double-digit prices increases.
At the same time, existing-home sales slipped 3.7% last month compared to February, the report found. That’s the second-consecutive month of declines in transactions, although sales were up 12.3% year over year for March—a sign that both limited inventory and affordability were slowing sales.
“Consumers are facing much higher home prices, rising mortgage rates and falling affordability, Lawrence Yun, NAR’s chief economist, said in the report. “However, buyers are still actively in the market.”
Indeed, housing inventory was down 28.2% in March, compared to the same time in 2020, according to the report. Homes sold in an average of 18 days, a record low.
“The sales for March would have been measurably higher, had there been more inventory,” according to Mr. Yun. “Days on market are swift, multiple offers are prevalent, and buyer confidence is rising.”
Regionally, the West saw the biggest dip in deals last month. Sales of existing homes there dropped 8% month over month, but are still up 15.5% compared to 2020, the report found. The median price was $493,300, up 16.8% from the same time last year..
Existing-home sales in the South were down 2.9% in March compared to February, but up 15.9% compared to March 2020, according to the report. The median price was up 15.6% year over year to $283,900.
Sales of existing Midwest homes increased a modest 0.8% in March, compared to the same time the previous year, and dipped 2.3% month over month, the data showed. The median price there was $248,200, a 13.5% jump from March 2020.
The Northwest saw the biggest increase in year-over-year sales in March, 16.9%, although it registered a 1.3% decline in deals compared to the previous month, according to the data. The median price has spiked 21.4% from March 2020 to $364,800.
Although mortgage rates are up slightly, they are still “favorable,” and Mr. Yun still considers the economic outlook “promising.”
“At least half of the adult population has received a Covid-19 vaccination, according to reports, and recent housing starts and job creation data show encouraging dynamics of more supply and strong demand in the housing sector,” he said in the report.
Many consumers may not realize it, but they’re increasingly competing against institutional investors and contending with soaring building costs.
Agents are exhausted and consumers are stretched thin. But despite everyone being fed up, the ongoing housing supply shortage drags on with no end in sight.
As Inman has previously reported, the problem is multifaceted. The coronavirus pandemic, for example, has reshuffled job markets. And at the same time, a years-long building shortfall and wave of millennials hitting homebuying age has further exacerbated the problem.
But those aren’t the only issues. In fact, there are multiple other forces that have, perhaps inadvertently, conspired to make housing both more scarce and more expensive — but which are also largely off the radar of most consumers. Despite their lower profile, though, these forces are having a tremendous impact on the housing market right now.
For our purposes here, we’ll focus on two such forces: the soaring cost of building materials, and the spiking interest in housing among investors. Together, these two things are major contributors to today’s housing market, and the lack of inventory that is sweeping so many markets.
Building supplies are getting way more expensive
The cost of building supplies has been ticking upward for a long time now, but according to David Logan — a senior economist with the National Association of Home Builders (NAHB) — the pandemic made the problem worse. That’s because the companies that make things like lumber bet that there would be a “precipitous drop in housing demand” during the pandemic, and that bet proved to be wrong.
“Producers of lumber, they shut down like most every other business needed to,” Logan told Inman. “But when production came back, mills had curtailed their production by as much as 50 percent.”
Logan called this a “fatal mistake” on the part of lumber companies, in part because demand for housing itself has surged and in part because on top of that DIY home remodeling has also become more popular during the pandemic.
The result is a kind of triple whammy where supply is low, while demand from both contractors and everyday consumers is higher than ever. It’s no surprise then that, according to Logan, the cost of lumber has tripled since a year ago.
“I would say it’s certainly unprecedented in so far as a surge of demand unexpectedly coincides with a large decline in supply,” Logan added.
Just by February, the NAHB estimated that this trend had added more than $24,000 to the cost of a newly built single-family home.
Data from the U.S Bureau of Labor Statistics further bears this out, showing that the prices for plywood, lumber, veneer, pallets and various other items have jumped up recently.
Lumber may be the most prominent material impacted by this trend, but Logan also said it is “by no means the only culprit in this increase of the cost to built a home.” Other materials that have seen price increases include concrete, the oriented strand board (OSB) that is used in home wall paneling, and many other products.
Another NAHB report further notes that the price of steel mill products has jumped 22 percent in just the last three months.
The consequences of these price increases are far-reaching. In a series of reports, NAHB has revealed that contractors this spring are now having difficult conversations with their clients about the cost of materials, and that those costs are delaying critical home repairs. The costs are also cutting into the supply of affordable homes, especially in lower-cost suburbs where wood-frame building is the most common construction method.
Logan doesn’t expect these conditions to last forever, but in the meantime he said the prevailing sentiment among builders is one of “concern.”
Institutional investors are flocking to the housing industry
At the same time that building homes is getting more expensive, deep-pocketed investors are also snapping up more and more housing. Rick Palacios Jr., director of research for John Burns Real Estate Consulting, told Inman that right now investors are buying 20 percent of all homes in the U.S. Asked if that was enough to sway prices and housing supply, Palacios answered without hesitation: “yes.”
“That percentage gets even higher in a lot of markets,” he added. “Almost a quarter of all housing transactions are going to investors.”
Palacios pointed to Phoenix as an example, saying that nearly 30 percent of sales in the Arizona city are to investors. Las Vegas, Houston, and Tampa, Florida, also all have higher-than-average numbers of sales going to investors. Many of these markets also happen to be iBuying hotspots, and Palacios said firms such as Opendoor can end up having a major impact on the supply landscape in cities where they are active.
Of course, “investors” is a broad category. Palacios explained that it includes everyone from fix-and-flip operators to iBuyers to rental companies. But the result of all this interest among investors is that would-be homeowners are facing more competition and higher prices.
A report from John Burns Real Estate Consulting — which was provided to Inman — further teases this idea out, showing that investors have zeroed in on lower-cost homes. The report also notes that “cash purchases account for 67 percent of homes sold below $100k and 31 percent of homes sold between $100k and $200k.”
Some of this investor activity makes obvious sense. Given that there is a supply shortfall, as well as soaring prices, flippers stand to make a significant profit by simply buying houses and then selling them a short time later. Palacios said places like Phoenix and Boise, Idaho, are ideal backdrops for that kind of activity.
Interest from landlords, on the other hand, may be slightly less understandable given that right now they have to pay top dollar for their properties. That contrasts significantly from the housing bubble in 2008, when institutional investors were able to snap up thousands of houses at a relative bargain.
However, Palacios said that “there’s a global quest for yield” going on among investors right now. At the same time, yields from vehicles like U.S. Treasuries have tanked while investment in commercial real estate became unappealing thanks to COVID-related shutdowns of stores, restaurants and hospitality businesses.
Residential real estate, and especially single-family housing, looks relatively safe by comparison. And Palacios said recent years have ultimately offered a kind of proof-of-concept that shows this type of investment works. As a result, institutions like pension and sovereign wealth funds — which may have mandates to invest in U.S. real estate — have increasingly gravitated toward housing. And if they have to pay top dollar for the properties, so be it because they’re in it for the long haul.
“Today’s investors are investing for both quick appreciation as well as yield and safety compared to other alternative investments,” Palacios added.
The John Burns report further notes that investors have gravitated toward residential real estate as a hedge against inflation and in an effort to diversify their assets.
This trend may not be readily apparent to consumers or their agents. When someone loses a bidding war, after all, they may never find out exactly who won. But like rising material costs, it is happening in the background and having a big impact. And that impact is likely to stick around for the foreseeable future.
“Housing investors are going wild, again,” the report ultimately concludes. “Limited new and resale housing supply, low mortgage rates, a global reach for yield, and what we’re calling the institutionalization of real estate investors are setting the stage for a home price boom that could stretch on for years, similar to the early 2000s.”
A Fannie Mae survey recently revealed some of the most highly-rated benefits of homeownership, which continue to be key drivers in today’s power-packed housing market. Here are the top four financial benefits of owning a home according to consumer respondents:
88% – a better chance of saving for retirement
87% – the best investment plan
85% – the chance to be better off financially
85% – the chance to build up wealth
Additional financial advantages of homeownership included in the survey are having the best overall tax situation and being able to live within your budget.
Does homeownership actually give you a better chance to build wealth?
No one can question a person’s unique feelings about the importance of homeownership. However, it’s fair to ask if the numbers justify homeownership as a financial asset.
Last fall, the Federal Reserve released the Survey of Consumer Finances, a report done every three years, with the latest edition covering through 2019. Their findings confirmed that homeownership is a clear financial benefit. The survey found that homeowners have forty times higher net worth than renters ($255,000 for homeowners compared to $6,300 for renters).
The difference in net worth between homeowners and renters has continued to grow. Here’s a graph showing the results of the last four Fed surveys:
The above graph only includes data through 2019, but according to CoreLogic, the equity held by homeowners grew by $26,300 over the last twelve months alone. That means the gap between the net worth of homeowners and renters has probably widened even further over the last year.
Some might argue the difference in net worth may be due to homeowners normally having larger incomes than renters and therefore the ability to save more money. However, a study by First American shows homeowners have greater net worth than renters regardless of their income level. Here are the findings:
Others may think homeowners are older and that’s why they have a greater net worth. However, a Joint Center for Housing Studies of Harvard University report on homeowners and renters over the age of 65 reveals: “The ability to build equity puts homeowners far ahead of renters in terms of household wealth…the median owner age 65 and over had home equity of $143,500 and net wealth of $319,200. By comparison, the net wealth of the same-age renter was just $6,700.”
Homeowners 65 and older have 47.6 times greater net worth than renters.
If your buyer is struggling to find a home for sale, they’re not alone. For every 10 homes for sale last year, there are fewer than five today. Home shoppers this spring have 52% fewer homes to choose from than last year, and they’re facing record-breaking prices, according to realtor.com®’s latest Monthly Housing Trends Report.
The national median list price in March increased to $370,000, a 15.6% jump compared to a year ago and an all-time high, realtor.com® reports.
Because of the high demand and low inventory, “home prices have skyrocketed, shattering previous records,” said Danielle Hale, realtor.com®’s chief economist. “We expect to see more sellers emerge in the weeks ahead, which should give buyers more options. Homes will likely continue to sell fast, but increasing interest rates and monthly costs could slow the pace of price gains unless we see a boost in demand from equity-rich repeat buyers.”
Listing prices increased the most in March in Austin, Texas, up 39.8% annually; Buffalo, N.Y., up 28.3%; and Los Angeles, up 24.8%.
Home buyers appear to be in a hurry. They are trying to buy before any further increases in home prices and mortgage rates, which have moved above their sub-3% averages over recent weeks.
But finding a home hasn’t been easy. ”In many areas of the country, there are half as many available homes for sale than a year ago—and in some markets that number increases to less than one-third,” Hale says.
The National Association of REALTORS® released its Pending Home Sales Index on Wednesday, which showed contract signings fell 10.6% in February, due to inventory shortages rather than a lack of buyer demand.