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For two years now, we have observed an important increase in home values. For the Washington/Arlington/Alexandria Metropolitan Statistical Area prices went up 10.7% between the first quarter of 2020 and 2021, and up 10.8% between 2021 and 2022 for the same period and from April 2021 to March 2022 (one year) prices increased 11.6%.
What are the reasons for that growth and are we going to see an important drop like we witnessed in 2008?
In this market, two factors are responsible for this phenomenon: the inventory of homes for sale cannot meet the buyers’ demand (1.6 months supply in June 2022) and the historically low mortgage interest rates (less than 3.0% for over a year).
Home prices and mortgage rates directly impact how much your mortgage payments will be. Low interest rates allowing buyers to offer more for a property associated with the competition created by insufficient inventory resulted in higher sales prices. Many homes were sold for an amount much higher than list price which is estimated to reflect the market value of the property.
What is the cause of the low inventory?
The low inventory today is related to underbuilding of new homes since the 2008 crash. Before the crisis, the number of new houses increased significantly. The loose lending standards that we observed during that period allowed more people to qualify for a home loan which created higher buyer demand. We ended up with an oversupply of homes which led to dropping prices. The aftermath was that some builders left the industry and the result was a long period with fewer new homes coming to market.
Will the value of homes come down like in 2008?
There are differences between the situation in 2008 and today. We have stricter lending practices compared to the loose lending standards of the previous period, undersupply of homes versus oversupply in 2008, and more equity in homes than before.
The mortgage rates are coming up, 6.0% for a 30 years fixed mortgage rate in August which slowed the demand. Inventory is building up but there still a shortage of homes to meet buyers demands.
Despite those factors, most major housing experts forecast ongoing home price appreciation in most major market but at a slower pace. For 2022, the average price increase forecasted is 10.3% according to different institutions ( Fannie Mae, Freddy Mac , NAR, Zelman, Corelogic, HPES, and MBA). We are still a sellers market (1.6 months in 2022).
Is it worth it to buy a home?
Buying a home is an excellent financial investment. It is a wealth creator which is mainly built by price appreciation gains, with many economic and social benefits. In fact, over the last 12 months Corelogic reports the average homeowner gained roughly $64,000 in equity due to home appreciation.
Sources: FHFA (Federal Housing Finance Agency), Corelogic, NAR.
(This blog has been written by Nicole and Bob Hamilton)
(Sculpture: “Salmon vendor” (Vendeuse de saumons) in Steatite from Quebec. Artist, Joseline Laramee. To contact the artist: joselinelaramee@gmail.com)
