While many businesses have struggled throughout 2020, the Real Estate industry has continued to see rising home values and record sales. Families who hunkered down together had lots of time to contemplate whether or not their current home still served their needs. Many decided it was time to make a change.
With homes receiving multiple offers and buyers scrambling to make quick decisions, prices increased over 10% in most areas. With no apparent end in sight, these conditions look eerily like those that preceded the market crash in 2008. Here are the reasons that make this time different.
1. The demand for homes is far exceeding the supply.
Prices for all items are driven by the laws of supply and demand. Real Estate is no exception. When homes are scarce, the prices will rise creating what we call a Sellers’ Market. Unlike items that are manufactured, you cannot just “make more widgets”. Inventory must be built up gradually by more builders building, or more sellers selling. In 2008, home values continued to rise despite close to 12 months of available inventory. Our current inventory is at an all-time low of only 1 – 2 months of inventory. This situation causes prices to rise naturally.
2. Lenders have raised the criteria for getting a mortgage.
Prior to 2008, if you were breathing, you could generally get a mortgage. The ease of getting a mortgage is measured by the Mortgage Credit Availability Index (MCAI). Developed by the Mortgage Bankers Association, the higher the number, the easier it is to get approved. Around 2006 this number had skyrocketed to over 868 from a previous average of around 400. Today’s number sits around 122 and buyers go through vigorous scrutiny before receiving their final “Clear to Close.”
3. Today’s Homeowners maintain a strong equity position.
The fallacy that homes always increase in value, previously led homeowners to treat their homes like a bank account and pull out money for items that did not increase the value of their home. The truth is, real estate IS cyclical, and values CAN go down. This usually happens in 7–10-year cycles. Today’s homeowners are better prepared. Close to 40% of homeowners own their homes free and clear, and many more are classified as equity-rich, owing less than 50% of their home’s estimated market value.
What does this mean for anyone thinking of buying and selling?
While we see no significant market correction looming soon, most homeowners are in a better position for any market fluctuations that may occur in the near future. Sellers continue to see quick sales, few repair requests, and record profits. Buyers are challenged to find homes, but those who persevere find that historic low mortgage rates still make this a great time to buy. Without a crystal ball, no one knows just how long these good times will last. Contact me today if you would like to know the true value of your home, or have any other market-related questions I can answer.