The spring housing market started early this year, not because of higher-than-average temperatures but because of hotter-than-average demand and overheating home prices. This year may be the starkest example of a post-recession reality that is redefining housing as we know it.
Housing affordability is the key to helping break yet another year of gridlocked inventory, but all signs are showing that homes this spring will be much less affordable than last year.
Affordability is being hit on several fronts: The foreclosure crisis is over, but it left behind an entirely new landscape for potential buyers. Entry-level homes are scarce because investors bought tens of thousands of them during the crisis and turned them into rentals. The number of single-family rentals jumped to more than 15 million, up from about 11 million in 2009, according to the U.S. Census.
Homebuilders continue to operate well below normal levels because of higher costs and a lack of labor, and thousands of construction workers left the business during the recession, never to return. Builders don't focus on entry-level homes because the margins are simply too tight, and prices for new construction are also rising at a fast clip.
What's more, credit is still tight, and the youngest cohort of buyers, the millennials, are delaying marriage and parenthood, the two biggest drivers of home ownership. The shortage of homes for sale has now pushed prices to a 30-year high. Rising mortgage rates only add to the pressure.
Housing demand climbed considerably this year, even compared with last year, as the leading edge of the largest generation finally moves into home buying and a stronger job market supports them. A monthly demand index from Redfin jumped to the highest level since January 2013, when the index began. Compared to January 2016, homebuyer demand was up 23 percent, led by a 26 percent annual increase in homebuyers requesting tours and an 18 percent increase in buyers making offers.
Soaring stock markets, still-low mortgage rates, and a steady economy bolstered homebuyers at the start of 2017. Homebuyers were not just window shopping. They were serious about making offers and getting to the closing table. However, this uptick in homebuyer enthusiasm won't guarantee strong sales in the coming months. With pending home sales down across the country in January despite strong demand, the lack of supply is a formidable foe for buyers this year.
Higher home prices in some areas are supported by improving local economies and employment, but in other markets, too much demand pitted against too little supply is resulting in overheated housing.
Potential buyers today are facing tough new realities. Some houses are clearly overpriced, and renting is still a better financial option in some markets. Competition is fierce for the best homes, and buyers have to be
ready to pull out all the tricks.
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