Welcome to our May newsletter, where we dive into national and local residential real estate trends. This month, we examine how the housing undersupply is increasing home prices and paving the way toward a more balanced market. We also discuss the sharp decrease in mortgage rates and the state of employment, which is historically one of the leading indicators of home valuations.
Currently, the housing supply is so low that demand far outpaces the number of homes on the market. Freddie Mac estimates that the United States is about 4 million homes short of meeting buyer demand. The housing shortage compounds when potential home sellers decide to stay out of the market because they feel they won’t be able to find a home to buy after they sell. Home builders, who have been slow to ramp up production after the 2008 crash, are drastically increasing new construction because they want to capitalize on the sustained demand for housing.
We expect relative housing demand to remain high over the next 12 months at the very least. New homes take time to build and will not come to market at the rate necessary to balance it. In March 2021, U.S. home builders started constructing homes at a seasonally adjusted annual rate of 1.74 million, up 37% compared to March 2020. New construction will eventually alleviate some of the shortage, but housing will remain undersupplied for months, if not years, to come.
As we navigate this period of high buyer demand and low supply, we remain committed to providing you with the most current market information so you feel supported and informed in your buying and selling decisions.
In this month’s newsletter, we cover the following:
Key Topics and Trends in May: Low home supply will continue for the foreseeable future, increasing bidding wars and driving up prices. The average U.S. mortgage rate decreased 23 basis points in two weeks.
May Housing Market Updates for the North Bay: Single-family homes are massively undersupplied relative to demand, causing prices to appreciate further. Condo prices remain stable and near all-time highs.
Key Topics and Trends in May
Last year, many individuals and families experienced feast or famine. Those lucky enough to stay financially unaffected by the pandemic were likely saving or investing more than expected, accruing more and more capital. At the same time, interest rates plummeted to hyperlow levels as millennials, the largest living adult generation, grew to prime homeownership age. With these factors combined, we saw the demand for homes skyrocket in 2020. The near-universal ability to work remotely changed motivations for moving. Relocating for a job or to be closer to the office was no longer necessary. However, due to the unique requirements of working from home, people began wanting more space. As a result, single-family home demand rose steeply, while condo demand lagged. As sellers listed condos, they bought single-family homes, driving single-family home inventory down. As the supply of homes declined, fewer new listings came to market—in part, because of the difficulty of finding a new home after selling.
One reason for the housing shortage has been the understandable hesitancy of builders to construct new properties since the 2006–2008 housing crash; however, this lack of new construction means that there aren’t enough homes on the market to meet the unexpectedly high demand. Over the last six months, new construction has ramped up considerably to an annualized 1.74 million new homes. The largest gains in new-home construction occurred in the Midwest, where housing starts more than doubled on a monthly basis. The Northeast and the South also saw faster rates of new-home construction, while home-building activity slowed in the West. Additionally, established metro areas lack land upon which to build, so adding meaningfully to supply through new construction can be challenging or fully unattainable.
As you can see from the chart below, new construction is now in the pre-housing bubble levels as home builders react to the surge in home prices and demand.
Mortgage rates rose significantly, slightly over 50 basis points, from January 2021 to mid-April 2021, but dropped sharply back below 3% in the second half of April. Although interest rates are still expected to rise to 3.7% over the course of the year, according to the Mortgage Bankers Association, the mortgage rate drop shows the non-linear path that rates will likely take. Because the mortgage rate affects affordability, the current low rate will only increase demand in the short term.
May Housing Market Updates for the North Bay
During March 2021 in the North Bay, the median single-family home price rose to another all-time high, while condo prices decreased month-over-month. Year-over-year, single-family home prices increased considerably, up 25%, while condos declined slightly, down 2%.