Home prices are expected to rise and there is no reason to believe that properties will become any more affordable in the near future. Here’s why:
Inflation. There is a direct correlation between inflation and home prices. When the money supply in the US increases, home prices also increase. We already know the fed has printed more money than ever before in the history of the US during the pandemic, and in fact, inflation was at 2.6% in April of 2020 and it has risen to 4.6% in April of 2021. Home prices will increase this year more than normal.
Interest rates. Due to inflation, interest rates will rise as well. If the value of money is decreasing due to inflation, lenders will require a higher return on their money to hedge the inflation. You will see an increase in mortgage interest rates. The difference between a 2.5% interest rate and a 3.5% interest rate can change your personal purchasing power as much as 10% since your loan amount qualification is based on your payment.
Side bar: If you qualify for a 10,000 per month loan payment (this does not include taxes and insurance to simplify this example) based on your income and debts, at a 2.9% interest rate, that means you can qualify for a $2,400,000 loan amount. The same payment with an interest rate of 3.9% qualifies you for a $2,100,00 loan amount. How much more house can you get with an additional $300,000 of purchasing power?There’s no bubble! Property values are based on supply and demand. Here are a few things that are deriving home prices increase.
Lack of new housing inventory. Due to rising costs of homebuilding, new housing starts are at the lowest they have been in decades. If new homes are not being built to meet demands for homes, then strained supplies become more strained.
Low interest rates. Low interest rates make high prices more affordable and more buyers enter the market place, increasing demand for homes.
High prices stifling moves. Home buyers who would normally be moving up to a larger home for their growing family or who would be downsizing to something more affordable, are unable to because home prices have increased so much. When homeowners don’t put their homes on the market, it further exacerbates a lack of inventory.
Banks restricting lending. Lending standards are also tighter than they have ever been before. Banks are not dolling out risky loans the way they were in 2008 and therefore the property owners that are leveraged are very qualified for the home they own.
If you’re looking to purchase property. Now is the time. For additional questions or information on the markets, contact me direct by phone or email. lauren@californianestates.com