There are few universal forces in our daily life that are more fundamental than supply and demand. It affects almost everything we do from the price we pay for groceries to the amount of houses available to purchase. While this concept is widely recognized and accepted, it is not always applied correctly in order to make the smartest decisions. This is especially true in real estate where misconceptions in supply and demand can lead buyers and sellers alike to make poor financial and lifestyle decisions.
General Overview of Market Conditions
As we stand in 2021, the prevailing real estate markets in almost every state lean in favor of seller dominance. The average cost of a home in Massachusetts, for example, has risen sharply over recent years and shows no signs of slowing down anytime soon. According to Realtor.com’s research team, the median listing price for the Boston-Cambridge-Newton metro area rose by 10% from December 2019 to December 2020. The median list price for this real estate market reached $649,050 last month, an all-time high. This is simply one example that speaks more towards average gains, some are seeing growth between 15%-20%!
One of the key reasons you are seeing these rates prevail is largely due to long lasting dips in new construction delivery. Ever since the Great Recession of the mid-2000’s, delivery of new product has been comfortably below what is needed to help fill typical demand. According to Zillow economist Matthew Speakman, we came into the 2020 recession with a current housing shortage of roughly 2.5 Million houses. The country has not cleared the 1 Million home hurdle for new delivery since 2007, leaving inventory to be gobbled up as quickly as it was built. While there is cause for optimism, Covid did inventory no favors as job losses that were extreme during the Great Recession, were once again front and center. With months of pause put on potential delivery and seller fears of listing, a perfect storm has been created to keep inventory at its lowest all time levels.
Looking at demand, we also hit all-time lows in another category in 2020. Interest rates bottomed out in the low 2% range when only months before we hit all-time lows in the mid/low 3’s. It has been commonplace to toss around the phrase, “free money” when discussing rates for the last year. This “free money” equates to the ultra low interest rates that prevailed due to a myriad of Covid related reasons. Suddenly, rising home prices were offset by lower monthly payments. People who were fortunate enough to retain their jobs, no longer were spending as much for commuting, traveling and discretionary items and the combination of these factors left many Americans with a large increase in buying power.
While on it’s a face a good thing, buying power plus no inventory equaled a fueling of rapid pricing growth. Soon, homes once pricey suddenly seemed unattainable or too good to be true. Marco Santarelli, founder and Ceo of Norada Real Estate Investments is not concerned about a bubble but an adjustment back to pre-Covid conditions as he stated, “what I’m concerned about is that prices will continue to appreciate at 10% to 15% a year and that’s not sustainable.” No matter which direction you look in, you are likely in a market that is seeing homes receiving dozens of showing requests and all but assuredly double digit offers. I myself submitted an offer a couple days back and ended up waiving all contingencies as well as offering nearly 115% of ask before finally securing the property for my clients. This is the new normal, at least for now, and experts tend to agree a buyer’s market is not on the horizon. Santarelli went on to reference general market figures around 6% appreciation are expected in 2022 furthering the trend of seller dominance.
If you are a buyer…..
STAY PATIENT! The dream of owning a home is alive and well, just playing possum for most of you ready to throw in the towel. Supply is redefining historical lows but snow is thawing for many of us and Spring is just around the corner. Even throughout the Covid pandemic, historical trends shaped charts largely as they have in past years. Cruising altitude was down, metaphorically for overall numbers, but holidays brought peaks and valleys, Fall brought the usual seasonal slowdown in the Northeast, and inventory is staying depressed as snow storms arrived this February. Next trend up: spring.
This is when you’ll be seeing the peak of inventory hitting the market and potentially the biggest rush yet to buy. What I am predicting will be the first break to be seen in 2021 will be May. This is where hopeful buyers remain renters after failed bid after bid and I think most uniquely 2021, though a seasonal trend in and of itself, there will be a mass exodus to post vaccination vacations. The “VV effect” will see folks simply put plans on hold while sellers continue to try and capitalize on selling at the peak. Kids being largely out of school systems may make it easier to travel sooner and I think you will see a softening begin as we enter the summer
Make no mistake, a buyer’s market is not coming, but this along with fall is where you must strike. Don’t forget that rates are inching up, more than inching in the last couple of weeks and rates are up half a percent with many lenders since mid-February. It is important to have an educated Realtor and an experienced lender to walk you through your opportunity cost of being patient. What seems too expensive to bear now might only get worse, here’s me pouring one out to naysayers a year ago.
If you are a seller….
LET THE GOOD TIMES ROLL! Our market was seller friendly before Covid and it’s all but a free for all now. Sellers can expect to do less work and get more money as their homes fly off the shelf as quickly as they hit the market. This also is causing a unique problem that is constricting inventory. Sellers remain afraid of the tornado of supply shortages coupled with buyer demand, leading many to sit on the sidelines for fear they won’t be able to buy their move up home. I can’t tell you how many renters I have in my pipeline with lease ends in July or September that would love to buy your home at absurd prices and let you continue living in it until you find a home. This real estate practice is called a “lease back” or “use and occupancy” arrangement which can be used to ease a lot of stress on both sides of a transaction if deployed effectively.
The point to walk away with is the fear that exists is largely avoidable. Sure, Covid is a real fear and precautions must be made but if you continue to grip the club too tightly you’ll never swing freely. What goes in golf often goes for real estate, hold on for fear too strongly and you’ll continue to see record lows of inventory simply furthering the cycle of affordability. Sell now, like right now, before you get lost in a bevvy of resale and new delivery.
NOTE: If you skimmed down to here, look up into the buyer section to see that our clients and many other agent’s clients are going to be looking to hit when there is weakness. Make no mistake, there will be flutters in 2021 so don’t get caught flat footed waiting for your ideal version of “normalcy”.
Supply and demand move us like strings move a marionette. Almost every aspect of our lives are dictated by its forces and real estate is no exception. RIght now we are in an extreme tilt in favor of sellers while inventory remains historically low, demand historically high, and interest rates approaching “free money” status. There is opportunity to be seen on both sides of the aisle in 2021, it is all about knowing when caution is needed versus when to strike with authority.
Continued seller hesitancy will lead to missed opportunity while immediate action will lead to high offers and an improved market. There is not a higher gap between demand and supply, historically, than the Winter market. This has never been more true than now so why are you waiting to get washed out in the Spring? Talk to your agent and make sure you have a unified plan to remain in your house after closing or target a short term stay with family, friends, or in a rental.
Buyers, be the tortoise not the hare. Time will come when you are only facing 3 competing offers not 30. In the time between, it is important to be pre-approved, on top of your finances and connected with the right practitioners. The right real estate agent and lender will prep you with current market data and predictions on future conditions, widely supported by top industry professionals. Preparation will certainly be the difference between another year renting and your first year building equity in your future.