What do you imagine when you think about America’s real estate? A high-end skyscraper in the heart of Manhattan? A cozy family residence like in Home Alone? Or maybe a tropical hideaway lost somewhere on the shores of Key West? America is all there is. You can find all types of properties there, along with the different ways to benefit from it as a real estate investor. But what are the trends behind the US real estate economy and in what way does it move?
Main takeaway: Home prices are breaking records and reaching historic highs; however, economists and industry professionals surveyed by Bankrate do not expect that it should lead to a disaster market crash.
Property prices
According to the National Association of Realtors, Median Sales Price for an existing home reached $426,900 in June 2024 – it’s a new record. And even though it slightly decreased in July to $422,600 (according to the National Association of Realtors), it was still the highest July median on a record.
Most experts agree that the main driver for such high prices is a strong demand coupled with not enough supply. Simply saying, there are far more buyers than sellers.
Why are there not enough homes for sale? Let’s dive into the supply shortage issue in more detail.
Homebuilders don’t keep up with the demand
The fog of the 2008th Great Recession hasn’t lifted yet and still reflects on homebuilding activity. The fact is that after the Great Recession homebuilding activity has slowed and never returned enough to meet the demand.
Homebuilders are struggling to meet the demand due to high costs for building materials, originally pushed by COVID-19 supply chain issues, high interest rates on loans to acquire and develop the land, strict lending standards for builders, and local zoning laws that restrict new constructions.
Current homeowners are not willing to list their properties on the market
Homeowners, who potentially could list their houses for sale, are not willing to do so. And there is enough logic in it.
First, even though mortgage rates have finally started a slight fall, pulling back from their record levels, they are still high enough to motivate the current homeowners to sell their current residences. Since July 2024, the national average 30-year fixed mortgage rate is 6.8%, according to Redfin. Borrowers who locked or refinanced their mortgage a few years ago are now enjoying comfortable monthly payments. In December 2020, the national average 30-year fixed mortgage rate was 2.7%, according to Redfin. Moving to a new home means the need to obtain a new mortgage accordingly, with a current interest rate twice as high as several years ago, which means giving up really good loan terms.
Shortage of available homes and high prices are also an important factor for the current homeowners. Due to a low supply on the market, it’s difficult to find a new property that will fit all your needs.
Also, according to Fannie Mae, rates and low inventory are not the only issue. Experts note other factors, such as satisfaction with the current home or location, proximity to friends, family, or a workplace, and economic instability.
In what way will the prices move?
Experts do not see any preconditions for strong price fluctuations in one direction or another. Any correction is expected to be modest with a probability of continued growth for the rest of the current year. Even if some markets will face a price decline, it will still be modest and not as steep as during the Great Recession.
What about rents?
Inflation, shortage of vacant rental properties, and barriers to owning a home also drive up rents. According to the America’s Rental Housing 2024 report of the Joint Center for Housing Studies of Harvard University, the number of cost-burdened renters hit a record high in 2022 as half of all households spent more than 30% of their incomes on rent and utilities. However, according to the Bureau of Labor statistics, rent price inflation itself is finally cooling down. In July 2024 it declined to 5.1% – the lowest level since March 2022, but still above average (4.21% from 1954 – 2024).
Is the market overheated and going to crash?
When it comes to record prices or anything outside the ordinary, a logical question comes to mind. Should the market collapse? However, economists and real estate professionals surveyed by Bankrate mention that collapse is not expected and is highly unlikely.
The current price increase is caused by basic economic laws: strong demand and the lack of supply. Currently, there are no low-quality mortgages or oversupply combined with overproduction of homes. Mortgage lenders have quite strict requirements for the borrower’s debt-to-income ratios, while the median mortgage borrowers’ credit score is impressive as well.
Is it a good time to invest in US real estate today?
Well, it depends. If you are looking forward to buying your own investment property and renting it out, even despite the strong demand for vacant homes and finally decreasing mortgage rates, it doesn’t guarantee you profits. You need to consider many factors while buying a property. For example, make sure your LTV (Loan To Property Value ratio, which increases or decreases your monthly mortgage payment) is in a range, which makes rental payments higher than your monthly mortgage payments. And of course, it’s important to find a good, profitable property (with the current supply shortage, it can be quite challenging).
If your goal is to diversify your investment portfolio, it’s a good idea to review equity REITs or tokenized real estate, where properties are carefully handpicked. But don’t forget that every investment should be calculated and conscious.
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