Though home prices have usually been set by the supply and demand, that calculation is astronomical in today’s market. This is because of an acute housing shortage.
This shortage can be seen at its worst on the lower end of the market, which is why the prices on that end are rising at twice the speed than homes on the high end of the market.
Home prices jumped 6.2 percent nationwide since September 2016, which is accelerating from the annual gains in previous months.
We’re seeing prices recover at nearly 46 percent from the housing crash of 2012 and are about 6 percent higher than the peak prices of 2006.
Yes, real estate market trends are determined by the supply and demand locally, which is why prices are rising more quickly in some markets compared to others.
What’s more telling? When you take a look at the price tiers of each market. The low end of the majority of markets is where the demand is as more and more people are looking to purchase their first home. This is also where the least supply is.
During the recession, builders had dropped production by more than half of their normal pace and have still yet to recovered. Lower-priced homes rapidly went into foreclosure, which is when investors bought millions of them and turned them into rental properties.
There are currently 5 million more single-family rental homes today than there were before the 2012 crash, and the vast-majority are entry-level homes that were part of the owner-occupant housing stock.
Because of the housing market shortage, home prices are rising much faster on the low end than the high end, where more supply is available.
Zillow conducted a survey that shows the difference in home price appreciation on the high end versus the low end of the market. The high end is defined as the top third of the market prices, and the low end is the bottom third.
It showed that the supply on the high end was much greater. The middle of the market is where most home builders are targeting, so there has been steady growth in supply. But, there has been little to no progress with the low end.
The chief economist at Zillow, Svenja Gudell, had a few things to say about the results:
“The past two months have shown promising signs of life from builders that have had difficulty meeting intense demand in the face of rising land, lumber and labor prices. But it’s going to take a lot more than two good months to fully erase the housing deficit we’re facing after years of under building.”
In the current market state, investors are unlikely to sell the lucrative rental properties in their possession. The institutional market for rental investors has consolidated recently and has streamlined its management.
Institutional investors, which is led by Blackstone’s Invitation Homes, currently owns more than 200,000 single-family rental properties, which has an estimated worth of $33 billion. And it continues to grow.
Sandeep Bordia, head of research and analytics as Amherst Capital, elaborated on this:
“Institutional activity in the single-family market continues to increase, driven by relatively attractive valuations, modestly strong home prices appreciation and stable financing. We believe that evolving demographics, financial factors and shifting consumer preferences, will keep demand for single-family homes elevated over the coming years.”
Millennials who might have been buyers are turning instead to single-family rentals as a result. These houses are often in good neighborhoods with good schools. This is where large-scale investors have targeted when entering the market after the crash.
Though it may seem, from a national standpoint, that home prices are not as overheated as the past few years, the reality is a lot different when you focus in on where the demand truly lies.
Gudell continued, “Income growth has been decent lately, but it has not kept pace with rising housing costs, giving renters in particular the feeling of trying to hit a moving target as they attempt to save a down payment for the jump into home ownership. There’s a lot happening just under the surface of the otherwise fairly predictable market, and not all of it bodes as well as we look ahead into 2018.”
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Original source article found here.
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