It’s no secret that home prices have been surging across the United States. In May, home prices increased at a rate that hasn’t been seen in over 30 years. Typically, increases like this impact a few markets at a time. However, home prices have been increasing in every metro area in the nation. While homes have been increasing in value in every part of the country, not every type of house has seen their prices increase at the same level. New data indicates that high-end homes and low-end homes have seen the largest increases in price over the past year. Why is it that the most expensive homes and the least expensive homes have seen their prices increase so much compared to other homes? What do these trends mean for home buyers and the real estate market overall? The team at Peopels Choice Mortgage is here to break it down. 

Data Regarding High-End and Low-End Home Prices

Redfin released new data that breaks down the rising prices of homes based on home type. In their report they divided homes purchased by home buyers into four categories: luxury, affordable, mid-priced, and most affordable. According to their research, luxury home prices have increased by about 26% and the most affordable homes increased by about 19%. In comparison, mid-priced homes increased by about 16% and affordable homes increased about 13%. These numbers paint a clear picture that there is a great amount of demand for every home type, but even more so for houses at the extreme ends of the spectrum. What can we take from these numbers that might be helpful for home buyers and homeowners? 

Why are Home Prices Increasing at Different Rates?

When you are trying to analyze the price of anything you always need to take into account of supply and demand. Demand is the easy part of the equation to account for in this instance. Demand to buy a new house has been sky high across the board because mortgage rates have been hovering near historic lows. Buying a house and locking in a low mortgage rate will keep your monthly payments reasonable and save you a lot of money over the life of your home loan. Home buyers have been in a rush to buy houses ever since mortgage rates dropped to these levels. 

The supply part of the equation is a little more nuanced. It is fairly common knowledge that the inventory of available homes to purchase have been limited. In fact, home inventories reached record lows during the spring. Limited inventory combined with strong demand sent home prices soaring across the board. The lack of inventory is not distributed evenly across all home types. There was a particularly acute lack of inventory in the most-affordable category and the luxury category. As a result, there was more price pressure on the extremes of housing types. 

First-Time Home Buyers Impacting Home Prices

Uneven supply is not the only thing driving up the home prices of the most-affordable and luxury homes. The demographic makeup of home buyers is also leading to the unequal distribution of housing price increases. One of the biggest trends of the most recent real estate boom has been the rise of the millennial home buyer. Millennials have made up the largest demographic of home buyers since the beginning of the pandemic. Recognizing the opportunity that low mortgage rates afford, millennials have been jumping into the real estate market as first-time home buyers. Typically, first-time home buyers and younger home buyers are attracted to starter homes, which makes up the homes in the most-affordable category. This has placed additional demand pressure on the most-affordable homes, which helped increase their prices higher than other categories. 

Rising Home Equity Boosts Luxury Home Prices

First-time home buyers are not the only demographic to take advantage of today’s low mortgage rates and red hot real estate market. Existing homeowners have greatly benefited from the current market environment. Homeowners have been able to take advantage of low mortgage rates by refinancing their current home loans. This has allowed many to lower their monthly payments and the overall size of their loan by decreasing the amount of interest they have to pay. 

At the same time, home values have been increasing along with home prices. As home values have increased, so has the amount of home equity that homeowners have. In 2020, homeowners in the United States saw their home equity increase by a combined 1.5 trillion dollars. Rising home equity has allowed homeowners to qualify for larger mortgages and trade in their starter homes for luxury homes. Rather than use their home equity for home improvements though tools such as a cash-out refinance, many homeowners have merely purchased larger homes. Homeowners who were suddenly flushed with equity saw the past year as an opportunity to move out of a home they were happy with and move into the house of their dreams. 

Final Thoughts

While fascinating, the above trends are sure to change. Demand should continue to be sky high as surging COVID cases mean that mortgage rates are unlikely to rise in the near future. However, supply is increasing, especially for homes in the most-affordable category. The report by Redfin indicates that many new units of most-affordable homes are coming onto the market in the near future. This will level out prices and give first-time home buyers a chance to stop renting and become homeowners. As far as luxury homes, Redfin notes that they are already seeing prices for luxury homes top out. 

The bottom line is that with the supply of homes increasing and mortgage rates remaining near historic lows, home buyers will soon face an incredible opportunity. Day by day it will be easier for eager home buyers to find a home that fits their needs and still be able to lock in incredible mortgage rates. If you have been interested in buying a home, but do not know where to begin, contact us. Our professional mortgage brokers can give you a complimentary mortgage qualifier to help you find out which home loan program is best for you. All signs are pointing to the fact that right now is the perfect time to buy the home of your dreams. Don’t delay or conditions might change.