Unless you’ve been living under a rock (and with today’s housing market, that very well could be the case for some of us), you know the real estate market is scorching hot right now. It’s popular to credit the pandemic for the increased demand, and while it has contributed greatly, many other factors were at work long before we ever heard of COVID-19.

Let’s take a high-level look at why it’s so hard to buy a home, and when you do manage to find one, why it’s so much pricier than it used to be.

The obvious: COVID-19

Yes, we already mentioned the pandemic, and yes, we noted that it can’t be wholly blamed for our current housing shortage. While that’s valid, it’s also true that COVID-19 spurred a sea change in the lives of many people. Many who lived in cities fled their close quarters for open spaces and more affordable states. People who thought they were confined to an office building learned they could work from home, and were unwilling to return to the cubicle once the pandemic subsided.

This graphic from Forbes illustrates the shift we’ve seen since the pandemic arrived.

On top of these lifestyle shifts, supply chain issues caused materials shortages and drove prices up, further crippling new home construction. And therein lies another problem…

The long-term: Declining home construction

Put simply, we aren’t building enough single-family homes for entry-level homebuyers. With millennials having reached their home-buying years (and having surpassed Baby Boomers as the largest current generation), the demand for affordable (about $300k) homes continues to rise. Construction of these homes, however, doesn’t. While it has been coming back up since tanking in 2009’s Great Recession, the pace of construction is still slow, slower, in fact, than it has been since 1995. 

To borrow a phrase from that decade: “Bummer, dude.”

According to lender Freddie Mac, “In 2020, we estimate that there were only 65,000 new entry-level homes completed—less than one-fifth of the entry-level homes constructed per year in the late 1970s and early 1980s.”

Just how big is the shortfall? Taking a look at U.S. Census numbers from January 2012 through June 2021, we can see that 12.3 millions new households were formed. (A new household is “formed” when someone moves out on their own, whether it’s from their parents’ home or from another shared living situation.) During that time, only 7 million new single-family homes were constructed. 

If we build it, they will come. (Right, Field of Dreams fans?) Without building enough of them, though, they’ll buy what they can…for a lot more money. And since builders can’t build fast enough to meet the demand, the sellers’ market is likely to continue. 

The money: Low mortgage rates

Hovering at around 3%, mortgage rates have hit a historic low. This low number has contributed to the hot housing market by giving buyers more buying power. Since they’re paying less to borrow more, it does give more leeway for buyers to absorb higher home prices. 

According to Bankrate.com, many experts expect rates to start creeping up as the year goes by. If this happens, it could begin cooling the market by removing that wiggle room for some buyers. 

Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association said, “The combination of higher rates plus increasing prices might price some people out of the market,” Kan said. “Younger buyers with a little bit less income, a little bit lower credit that are looking for these cheaper homes.” 

The takeaway

The lowest mortgage rates in history and the pandemic have both contributed to the current real estate market. The biggest problem continues to be the lack of inventory available for purchase. Between builders not being able to build enough single-family homes, combined with people electing to stay longer in their current residences, there just aren’t enough properties on the proverbial shelf for everyone. 

It all comes down to your patience, your priorities, and your cash flow. Are you willing to put in the time, risk the disappointment, and pay the extra money the current housing market dictates? Maybe so and maybe no, but with our help, at least you’ll know what you’re getting into.