What’s Up With Real Estate?

What’s Up With Real Estate?

The U.S. housing market is still suffering from low inventory: too few houses available for the numbers of home-seeking buyers. Naturally, the capitalist principals of supply and demand kick in, meaning that prices inevitably rise when there are too few products available to purchase.

The problem may have become exacerbated in recent years, but the root of the issue started in 2008 during the financial crisis and housing market crash. While home values rebounded and the sales market grew robust, the homebuilding industry never fully recovered. According to the National Association of Realtors, the U.S. needs an average of 1.5 million new homes built every year to keep up with demand, but we haven’t kept up with that average since the Great Recession. In fact, we are currently short by between 3 and 4 million residences.1

If you own a home, higher prices have likely increased your property value. In 2021 alone, the typical home value grew by about $50,000. The median sales price of existing homes increased by 15% in 2021 to $350,300.2 Historically, homeownership has been one of the most fruitful ways to build wealth in the long term, as it is both an asset that grows and one that is instrumental to daily life. While a home may be our sanctuary, it may also represent one of the largest single assets that we own.

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On the flip side, if you’re in the market to buy a home, the situation may look dour. Millennials and Generation Zers who are trying to buy their first homes and begin that long-term wealth accumulation strategy are getting shut out of the market due to high prices and intense competition. Historically, first-time homebuyers comprise nearly 40% of annual sales. However, first-time homebuyer sales dropped from 33% in early 2021 to 27% in January 2022. In that same timeframe, cash-only sales increased from 19% to 27%.3

Some of the changes in the home-buying market have been driven by the pandemic. As more people have the opportunity to work from home, there has been an exodus from large high-rent  cities to more affordable areas. According to data from the U.S. Postal Service, Atlanta, Houston, Dallas and Tampa have seen more new residents move to those areas.

In fact, according to analysis by Apartment List, one of hottest rental markets in the country in 2021 was the Tampa Bay, Florida, area — a warm weather destination with relatively low rents for larger spaces. The other hot rent rental market was New York City. There, rents declined by a fifth after the mass exodus in 2020, then increased by more than 30% as new arrivals increased demand.4

Those two locations are particularly interesting since hurricanes and storm surges are expected to become more frequent in coastal areas along the Gulf Coast and East Coast — especially in New England and the mid-Atlantic.5 This will lead to higher living expenses to pay for increased homeowners insurance premiums, updates to protect property and out-of-pocket repair expenses after flooding.

Starter and mid-ranged homes have been scarce for quite awhile, but the demand for luxury homes has outpaced supply. Since high prices for starter homes have made them undesirable for many, Millennials are opting to wait and save up for luxury homes as their “starter homes.” This, too, has been impacted by COVID-19, as older homeowners who traditionally would downsize have opted to remain in their larger homes or upgrade, driving prices even higher. Sprawling estates that include a pool and tennis court suit their desires for social distancing while allowing for recreation.6

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