Homeowners and potential buyers are not reliving the housing market crash of 2008. But there is a housing shortage that is having a butterfly effect on the property market – mortgage rates are rising daily, bidding wars are becoming the norm and many once-qualified homebuyers are left behind.
As if buying a new home didn’t come with enough stress, the shortage has raised the bar on factors like loan qualification, competition and outright availability.
But how exactly does the current housing shortage differ from the crash of 2008? The catalyst for the 2008 crash was the widespread and irresponsible deployment of flimsy loan programs and products, which enabled underqualified borrowers to obtain advanced loans. Fueled by low interest rates, easy credit and insufficient regulation, the housing bubble eventually burst and left many homeowners with mortgage payments they could not afford. These homeowners were often forced into default and homes became foreclosures, leading to the massive collapse of mortgage-backed securities markets and the economy in general.
In short, the 2008 crisis was caused by unregulated lending and irresponsible lending. There was no real control and the lender/appraiser relationship lacked valuation independence.
Today’s market volatility has a more benign root cause: people are simply not selling their homes as often as they used to, opting instead to renovate or upgrade their existing home. This trend has been exacerbated by the pandemic, which has nearly eliminated the possibility of building a custom home due to global shutdowns that have reduced the availability of building materials and caused their prices to skyrocket.
It sounds like a word problem in a math textbook: when you subtract the ability to build houses and combine it with a drastic decrease in houses available for sale, what are you left with? The answer is an alarming ratio, with buyers far outnumbering sellers.
What is the market outlook amid the housing shortage? Much like the pandemic, the housing shortage is pushing many people to make life-altering decisions, such as leaving the area for states with lower costs of living. Because the shortage has created a highly competitive seller’s market, homeowners who are ready to sell now often receive a premium price for their home.
There’s no denying that now is a fantastic time to sell, especially if your plan involves moving to states with a lower cost of living. Many residents of New York and Connecticut are selling their family homes for more than they ever imagined, trading their Northeastern roots for much cheaper but likely comparable homes in Texas or South Carolina. Those approaching retirement age are particularly well placed to take advantage of such an opportunity.
If a spontaneous move isn’t in the cards for you, you’re not alone. Maybe you are ready to sell, but not ready to retire or leave the area. In this case, downsizing to a townhouse or condo is a viable option. It’s true that homes in multi-family communities are also selling very well right now, but these properties have the potential to become income-generating in the future, should you choose to move out of the area and rent out your home.
Construction loans are also about to make a comeback, likely before the housing shortage resolves itself. The lack of housing inventory before the pandemic made building a house a fantastic option – and if you couldn’t find what you were looking for, you could build it.
Although the supply chain continues to recover and prices are still higher than before, getting a construction loan and building a house could be a great alternative as the industry continues to recover.
There’s also an important silver lining to remember when considering mortgage rates, housing shortages and rising prices: it’s all relative. When I bought my first home in the 1990s, the mortgage rate was over 9%. Compared to the 5.125% we see today, and compared to rates on other loans like student loans and auto loans, a rate of 5% suddenly doesn’t seem so stunning.
Of course, the rate at which increases are occurring is alarming, and rates will likely continue to rise throughout the coming year. But relativity is important for navigating today’s unpredictable market.
Overall, real estate is an industry in which the value of your assets almost always appreciates over time. A volatile market is always a little unnerving, but at the end of the day, the best thing potential buyers can do is find an expert to help them through the uncertainty. With an experienced lender by your side, you can take the home buying process one step at a time and ensure that you are making sound financial decisions for you and your family.
David Carey is vice president and director of residential loans at Tompkins, the financial institution headquartered in Brewster.