Breakdown
Housing inventory levels are at historic lows
Mortgage rates are currently 2-3x higher than in 2021
Continued rise in home values
Institutional investors
Most would assume that if the cost of ‘something’ goes up, the demand for that ‘something’ will go down. It’s basic supply and demand theory that has been proven time after time. Multi-billion dollar companies use this equation for projections, pricing, and logistics as an effort to maximize margin with the resources that are available and it works.
Why isn’t demand for homes in the United States not going down? Home prices continue to rise along with mortgage rates. In theory, as home prices go up, demand cools off. In theory, as mortgage rates go up, demand cools off. So if home prices and mortgage rates go up, why in the world isn’t the demand for housing in the United States going down?
With available housing inventory levels hovering around 1,000,000 homes available for sale, the U.S. is facing a housing inventory crisis, given that there were nearly 4,000,000 homes listed for sale just before 2008. In fact, TradingEconomics.com and NAR reports that June 2023 indicated 860,000 homes available for sale. This is the lowest available inventory since 1982.
Even with mortgage rate steadily climbing since 2021, the U.S. economy is responding as it probably should. “Current rates are more than double their all-time low of 2.65% (reached in January 2021).” Source: themortgagereports.com.
The 30 year mortgage rate for the week of July 13, 2023 is 6.96% according to YCharts. The overall average mortgage rate between April 1971 and June 2023 is 7.74%. Couple historic low inventory levels with 30 year mortgage rates that are still less than the 52 year average and we end up where we are today; not to mention the fact that 2% & 3% rates were less than two years ago. Curious where rates are headed next? Here’s one way to tell: TheHomeLoanHub.com.
With consideration given to low inventory levels and relatively low mortgage rates, it seems to make a bit more since why home prices aren’t plummeting. In fact, home values in the United States increased by 18.8% between April 2021 and April 2022, says CreditKarma. But that’s not all!
Supercharged Housing Demand is Coming
If you haven’t heard of institutional investors, get ready because you will likely hear more about them in the near future and here’s why.
First, let’s explain what real estate institutional investors are. Real estate institutional investors are large investment companies who are known to purchase 100+ real estate properties at a time. Their purchase power is massive and they have the ability to execute these purchase transactions with cash. Institutional investors have the capability to invest billions at a time. This approach makes it challenging for individuals to compete with because they’re buying one property and very likely financing it, so they are probably paying a higher purchase price.
Second, it’s important to realize the rate of real estate acquisition that’s taking place by institutional investors. NAR reported that institutional investors purchased 13.2% of all properties sold in 2021 and that the prices of those homes purchased were 26% lower than the state median prices during that period.
Bankrate.com claims that this trend is growing. Nearly 28% of all home sales in the entire state of Texas were purchased by institutional investors.
If Texas doesn’t concern you, check out Charlotte, North Carolina. Institutional investors accounted for 32% of all home purchases there during Q4 of 2021. Source: https://www.wbtv.com/2022/04/12/corporate-investors-are-buying-up-properties-across-mecklenburg-county-whats-solution/
Needless to say, but will share anyway, the rise of institutional investor real estate purchases will not help the housing demand crisis that we’re currently facing in the United States. MetLife claims that institution-owned real estate will account for 40% of all real estate in the United States by 2030.
What You Can Do About It
Individual buyers and sellers, real estate agents and home loan lenders – this message is for YOU. If selling to make some quick cash at a discount or buying with the sole purpose of investing to rent and generate cash flow is your intent, then you may be part of the problem.
We need to work together with the intent to help one another. That doesn’t mean work for free or undercut each other in transactions. It just means to take each other and the future of American real estate into consideration when you’re negotiating or helping clients. If this doesn’t happen, we as a nation will remain on a sad trajectory of losing the opportunity to establish and build our families on land that we can call our own.
If you’re a buyer, then try and sweeten the offer. If you have cash, consider being transparent about it with the seller and collaborate with respect. Ease up on the contingencies. If you’re asking the seller to pay for your closing costs and come down in price and make a laundry list of repairs, when there are other buyers making asking price offers (in cash) with no contingencies, how much of a chance do you think you’ll have at getting your offer accepted?
If you’re a seller, pay close attention to the name of the buyer on the offer letter. If it’s an LLC or company name, you could be negotiating with an institutional investor. Money talks – no one can argue that. But if that’s the case, maybe take the neighborhood and community into consideration before accepting their offer. Are there any families making offers that are competitive at all? If there are, it’s likely they’re offering less and asking for seller covered closing costs, along with finance and appraisal contingencies; possibly inspection contingency as well. It wouldn’t hurt to counter their offer with removing the seller concessions and inspection contingencies – just to see how they respond.
If you’re a lender, issue a SOLID preapproval and make sure the closing is ON-TIME.
If you’re a real estate agent (either side) communication, communication, communication!
Like what you’re reading? Check out my other articles at TheHomeLoanHub.com
Terry Roberts, USMC Veteran Sr. Mortgage Broker NMLS 397987 E Mortgage Capital, NMLS 1416824
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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