Get Ready, Home Buyers
The real estate market has been a double-edged sword for home buyers. On one hand, mortgage rates fell to historic lows and have remained near those levels ever since. On the other hand, inventory also reached historic lows, which in turn has caused a record rise in home prices. This has led to a difficult situation in which demand from home buyers is at all-time highs, but finding a home is really tough due to the low inventory. Even if you found a home you like at a price you can afford, the high demand from home buyers means you were likely going to be in a bidding war. Thankfully, the real estate market will soon present more opportunities for home buyers. There are some fairly good indicators that housing inventory will increase over the next year. This is great news and homebuyers should get ready.
How Housing Inventory Impacts Home Buyers
Housing inventory is something that all potential home buyers should be paying attention to. Inventory is one of the key components of housing prices. In the housing market, the price of a home is determined by supply and demand. If there is a low supply of homes, but there is a lot of demand from home buyers, then the prices are going to be high. Additionally, inventory directly affects how easy the home buying experience will be. Low inventory makes it less likely you will find the house of your dreams. You are limited to what is available on the market and might be forced to compromise. At the same time, you might not even get your house, even if it is the house of your dreams. In a world of limited inventory, it is likely that the house you want to buy is receiving multiple offers.
Right now, the real estate market is very much a seller’s market. Home sellers have all of the leverage because there are not enough houses on the market compared to the number of home buyers. In order for the scales to tip back toward the other direction, we need to see more houses available to buy on the market. There are two ways that will happen: more existing homes will be sold by their owners and more new homes are built. How likely are these two scenarios to happen? What can we expect over the next few months?
Home Sellers More Willing to Sell
If the data is true, homebuyers should start rejoicing because it looks like we might see an influx of existing homes for sale on the market in the next year. One way to predict what we will see from home sellers is to look at seller sentiment. Based on December’s data, home seller sentiment is very high and rising. Last month, 76 percent of all potential home sellers are confident that they will put their house on the market sometime soon. To put these numbers in context, 76 percent is 26 percent higher than home seller sentiment one year prior. To add further context, this is the third highest home seller sentiment recorded since 2010. This is not the only data. Another survey indicates that two-thirds of all potential home sellers plan to list their home within the next six months.
Early in this real estate run, it seemed like homeowners were reluctant to sell because they wanted to see how high home prices could go. Right now, it looks like home prices have reached a point that many homeowners feel selling now would be a great opportunity to profit greatly. If this data holds true and many homeowners think that now is a great time to cash-in on rising home prices, then home buyers would benefit.
New Home Construction is Increasing
Even if homeowners are reluctant to sell their homes, more inventory can be added to the market if new homes are built. Based on the data that we are seeing from the end of 2021, it looks like we should be prepared for that to happen. New housing starts increased in November by 11.8 percent from October. Then, new home starts increased another 1.8 percent in December. Overall, new home starts increased 2.5 percent from the previous year. To put that in context, construction has begun on about 1.6 million new residential units. Once these are completed, homebuyers could have a lot more options.
The data also seems to indicate that new home construction will not slow down anytime soon. Not only did new construction starts to increase, but so did permits for new housing projects. Permits for new residential housing increased 9.1 percent in December from November’s numbers. What is unique about these numbers is that there were a lot more permits issued for multifamily units than single-family units. In particular, there were a lot of permits issued for two to four unit dwellings.
This might create an even better opportunity for many homebuyers, but especially first-time home buyers. Two to four unit dwellings are treated just like a single-family home when it comes to applying for a mortgage in many respects. First-time homebuyers can use FHA loans to purchase multifamily residences. This means that they could buy a multifamily residence with as little as a 3.5 percent down payment. The big difference between a mortgage for a single-family home versus a multifamily home is in the calculation of monthly payments. Lenders want to make sure you can afford your monthly payments. For multifamily homes, you can use the potential income of renting out some of the units to help cover your monthly payments. This creates a unique scenario where multifamily properties can actually be more affordable for first-time home buyers than single-family properties, even though they cost more.
Final Thoughts
Potential home buyers should be excited by the above data because it looks like more houses will be available on the market in 2021 than last year. This means fewer bidding wars, a greater chance of finding the perfect house, and possibly an end to skyrocketing prices. The best way to take advantage of this is to be prepared and that means speaking with a mortgage broker. Meeting with a mortgage broker can help you determine what kind of mortgage you can qualify for now, which will help you determine your home buying budget. Furthermore, getting prequalified for a mortgage will help you close on a home much quicker. If the data we have covered holds, then this year will be a great opportunity to buy the house of your dreams. That is why it makes sense to make the preparations necessary to take advantage of that opportunity.
