If you’re looking to buy a home in the months ahead, get ready for stiff competition and relatively high prices in much of the country. An unprecedented shortage of available homes for sale means many properties often see multiple offers, and low mortgage rates have been pushing prices up.
New home construction has started to pick up as the weather has improved, but builders can’t keep up with demand.
It’s a basic supply and demand problem. Too many interested buyers and too few available properties are pushing home prices higher.
How long will the housing shortage continue?
The National Association of Home Builders estimates that new homes are being constructed at a rate of 1.42 million per year, which Gay Cororaton, senior economist and the director of housing and commercial research at the National Association of Realtors (NAR), said is not sufficient to address the current shortage.
“In the next three to five years we’re still going to be experiencing tight housing supply,” she said.
The pace of new home construction and existing home turnover means it will take many months for the housing supply to reach a healthy level again. As a result, homebuyers are unlikely to get relief from rising prices anytime soon.
That makes long-term planning even more crucial for aspirational homebuyers.
Saving for a down payment means tracking home price increases — which jumped up almost 15 percent last year, according to NAR — and figuring out how much you may need to front a few years down the road. And, Cororaton said, you need to make sure you’re saving up to cover your closing costs and other moving-related expenses, too.
Why is low inventory pushing up prices?
This housing shortage is the result of a few key factors according to Cororaton. Strong demand, fewer people listing their homes, unfavorable zoning regulations in many cities and a lack of skilled laborers have all combined to squeeze the real estate market.
The inventory of homes for sale in January 2021 fell nearly 26 percent compared with January 2020, the National Association of Realtors reports. Meanwhile, there’s just a 1.9-month supply of homes on the market.
“All in all we’re short now about 3 million homes,” Cororaton said. “That’s a lot of homes to catch up on.”
On top of that, she said, current homeowners are staying put longer, which means there is less turnover of existing homes. The reasons for this aren’t entirely clear, but homeowners wanting to hold onto super-cheap mortgage rates and a reluctance to let buyers view the house during the pandemic are issues.
“The typical tenure is about 10 years. It used to be people moved in about seven years,” Cororaton said. “Typically if you reach retirement age, you might go into a retirement home, releasing that supply of housing to the younger buyer, but older people are staying in their homes longer, so that’s not increasing the supply of homes out there.”
Low supply means high competition, and buyers seem to be willing to pay more to come out ahead in bidding wars, or remove contingencies to make their offers even more attractive.
What can homebuyers do as prices rise?
Today’s real estate market is stacked against buyers to a certain extent. Low mortgage rates mean the average buyer can afford a larger loan, which is further driving prices up, and limited supply is increasing competition. It’s a seller’s world, but that doesn’t mean buyers can’t take some steps to stand out.
“Buyers should brace themselves for tight supply,” Cororaton said. “Make sure they get prequalified when they’re thinking of buying a home.”
Mortgage prequalification or preapproval are processes that lenders use to vet potential borrowers in advance. Prequalification is a little easier to obtain than preapproval, but showing up to an open house — virtually or in person — with a preapproval letter in hand shows the seller you’re serious with your offer, and can actually afford the price you say you’re willing to pay.
Prequalification and preapproval are only strategies for those who are ready to make an offer imminently, but buying a home usually takes long-term planning.
“Buying a home is a major investment, it doesn’t happen overnight,” Cororaton said. “Plan ahead, plan when you think you’re going to buy a home. Save for a down payment.”
She added that it now may be more important than ever to think about starter homes with a plan to move later. Saving for a down payment can take years, and even once you’ve saved up, you need to stick to properties you can afford.
“When you’re ready to buy your home, have realistic expectations,” Cororaton said. “Maybe you need to start with a smaller condominium or smaller town house, build equity on that and then move to your forever home.”
Be prepared and ready to jump on homes that are listed
Here are some good strategies to make yourself a more competitive buyer in the current market:
- Get to know the area where you’re buying
- Conduct your own mini-appraisals to help you tailor your offer
- Expect to pay more than the asking price
- Consider offering concessions
- Get pre-approved for more than the asking price
Home prices are likely to keep climbing as supply remains strained, but there are some things you can do like long-term planning and prequalifying for a mortgage to boost your chances of making a winning offer in this competitive market.