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Home prices and sales continued to climb despite a mild winter cooling. But the housing market is facing a new dilemma: the supply of existing homes for sale has hit an all-time low nationwide, further fueling price competition.
Total home inventory fell to a record low of 910,100 units in December, down 18% from the previous month and 14.2% from a year ago, according to the National Association of Realtors. (NAR). This was the lowest amount in more than 20 years since the data was collected.
“We saw inventory numbers hit an all-time low in December,” NAR chief economist Lawrence Yun said in the data release. “Homebuilders have already made progress in 2022 to increase supply, but it will take years to correct gaps like the ones we’ve seen recently.”
Tight housing supply also means home buyers are vying for fewer homes on the market. For this reason, most housing experts say prices will likely continue to rise.
“The market is still extremely competitive and will remain so for the next two years,” says Christian Wallace, head of real estate services at Better.com.
Wallace noted that inquiries to buy a home through Better.com rose 28% in the first 27 days of 2022, even as mortgage rates hit their highest level in nearly two years.
Home prices rose 19% annually in November, according to the latest NSA S&P CoreLogic Case-Shiller National House Price Index in the United States. In December, sales of existing homes fell 4.6% from the previous month, according to NAR. But that month-long decline pales in comparison to the 8.5% increase in sales for the full year 2021, the highest annual level in 16 years.
Most real estate experts say that buyers who want to buy a home in today’s market will likely end up paying top dollar or above appraised value.
“We have clients who have been shopping for three to five months, and if they are not willing to pay too much, their offers are systematically beaten by higher bidders,” explains Tabitha Mazzara, director of operations at MBANC (Mortgage Bank of California). “It’s a real seller’s market right now, with more adherence to seller inquiries than normal.”
Cash buyers and investors outpace the housing market
Not only are buyers facing higher home prices, but mortgage rates have climbed more than 50 basis points since late December to 3.55%, meaning the cost of a mortgage has already risen. This year.
For many homebuyers, higher mortgage rates play an important role in the price of the home they can afford. If they don’t have significant cash savings to reduce the cost of the mortgage or compete with cash buyers, they end up being squeezed out of the market.
“Buyers are still operating on FOMO [fear-of-missing-out] fashion. But as rates go up, that’s likely to change and they’ll become more conservative,” says Melissa Cohn, regional vice president and executive mortgage banker at William Raveis Mortgage.
Although first-time buyers still make up a large share of the market – at 30% of sales in December – it is down 1% from a year ago, according to NAR. Cash buyers (including investors), however, increased to 23% of the selling market from 19% the previous year.
Investor appetite is partly driven by an equally buoyant rental market where the median rental price jumped 17.8% last year, far outpacing annual growth of 2.3% on average over the past last years before Covid-19 hit. And investors immediately caught on, buying single-family homes to rent out.
“The boom in the single-family rental industry, which has grown tremendously with no signs of slowing down, has already impacted the competitive nature of buying dynamics in some markets as more investors are looking for inventory,” said Patrick Burns, CEO, and co-founder of Spruce, an online platform for real estate transactions.
Tips for Buyers in the Hot Real Estate Market
Real estate experts agree that unless you have an unlimited budget, be prepared for a lot of dedication and even some disappointment. There are instances where buyers have been looking for homes for over a year, so this is not a market for the faint of heart.
In fact, a recent HomeAdvisor survey reported that 86% of homebuyers who purchased during the Covid-19 pandemic said buying their home was a stressful experience. And 79% said they lost a bid on at least one property, more than double the 31% who said they lost a bid when buying a home before the pandemic.
Here are some tips to help you navigate this fierce market.
- Look for homes that are priced below your budget. Bidding wars are common in today’s housing market, and there’s a good chance that multiple people will be bidding on the same home as you. Targeting homes below your budget gives you the flexibility to raise your bids, if needed. It’s financially smarter than stretching your budget or buying something you really can’t afford.
- Lower your interest rate. If you can’t lower the cost of the home, you can try lowering the interest rate on the mortgage you’re prequalified for by working with the lender. It could mean improving your credit rating; buy so-called “points” to reduce the rate; or reduce your debt-to-income ratio (DTI). A good lender will tell you how to get the best rate.
- Find a very experienced real estate agent. A great real estate agent can make the difference between winning a home or not in today’s highly competitive real estate market. Seek referrals from friends and family. And make sure the agent knows the market you’re interested in and keeps your needs top of mind, including walking away from a potential bad deal.
Be Careful When Giving Up Contingencies
As the housing market warmed up last year, more and more buyers were foregoing the contingencies, namely home inspection and appraisal, which are often required in a home sale contract in order to protect the buyer.
Some buyers did this to win the auction. But that also means they’re probably responsible for all the repairs, which is a huge risk down the road.
However, housing experts and recent reports have indicated that this trend may be slowing down. For one, the appraisal process has become more efficient since the pandemic, making it easier for borrowers to get an appraisal, says Gay Cororaton, senior economist at NAR. She also says the high prices mean buyers are likely more likely to err on the side of caution before committing to such a large investment.
“I think real estate agents have worked with buyers to make them understand that it’s not good to forego these contractual contingencies,” Cororaton says. “After all, buyers are paying for homes that are at historically high levels.”