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In residential real estate, it’s either a buyer’s or a seller’s market. Despite low mortgage rates and declining levels of consumer debt, the current state of affairs confirms sellers have the upper hand.
What’s happening today in the residential real estate market is a simple lesson from Economics 101: demand is outstripping supply.
“The supply of existing homes has yet to show any post-pandemic bounce, limiting sales volumes while driving up the prices of transacted homes,” notes Nationwide’s David Berson.
Exacerbating the supply woes are yield-hungry investors looking for rental income. Those market participants, who aren’t looking to live in the homes they’re purchasing are competing with traditional buyers and driving up prices in the process. In some cases, those investors are gobbling up properties before they hit popular real estate websites.
Making matters worse for buyers is who the competition is. Families looking to transition from rentals to single-family homes or buyers looking to upgrade from apartments or condos are pitted against the deep pockets of pension funds and private equity firms.
Compounding those woes are surging raw materials costs, which are limiting the number of new homes builders are constructing. For example, some market observers believe rising lumber costs (lumber is one of this year’s best-performing commodities) could eventually put a damper on the hot housing market.
“Housing starts fell back sharply for April as cost pressures and supply constraints have cut into construction despite strong market demand,” adds Berson.
The problem many would be home buyers are facing is the circular nature of the current residential real estate market. As noted above, there may be a commodities-induced cap on new homes being constructed, but even for existing homes, buyers are facing unwanted competition from well-heeled investors and aspiring landlords. Unfortunately for buyers, upcoming data will likely show a decline in the supply of existing homes.
“Although they should pull back from March’s rapid pace, robust housing demand and a low supply of existing homes likely led to strong new home sales for April,” according to Berson.
Indeed, there are valid reasons why the Dow Jones U.S. Select Home Construction Index is up 24.27% year-to-date.
For more on income strategies, visit our Retirement Income Channel.
