The housing market is red hot going into 2021 — good for sellers, but bad for buyers. The size of an average U.S. homebuyer’s mortgage recently hit a record, and the housing market gained more value in 2020 than any other year since 2005. The median existing home price surged nearly 13 percent in December 2020 compared to the same time-frame a year ago. And, home seller profits (the difference between market value and mortgage principal) soared in 2020 as sales prices set new records.
Don’t let that alarm you. Before first-time and repeat homebuyers react to the latest news, some much needed background is needed. Prices on homes are shaped by housing supply versus homebuyer demand, and right now, prices seem out of control, but there’s so much more to it:
- Consider rates, homes for sale and total housing stock. When the average interest rate on a mortgage goes down, more people buy homes. Purchasers can often buy more house for the same money or save each month. However, putting interest rates aside, home purchases can only rise as high as the availability of local homeowners willing to sell. In turn, this on-the-market availability can sometimes be impacted by how many total housing units have been built in any given area (also known as “housing stock”) — no matter how new or how old. This is why a faster pace of new-home builds coming onto any market is usually a good thing for the market’s health and the local economy.
- Buyers should focus on “inflation adjusted” home values. The average buyer perceives today’s prices in relation to yesterday’s housing crash, and they shouldn’t. Why? Because of inflation. Oftentimes, buyers incorrectly look at “nominal prices” of today versus the past — essentially what homes in a neighborhood cost using today’s dollars compared to 10 – 15 years ago. But because of annual inflation, money and home values are “worth” less today than 10 – 15 years ago, which means many properties that seem overpriced today really aren’t.
- Regional home and “local household affordability.” Block out national and state figures and consider what’s happening locally. Local household affordability is what a median-earning household in your city (total gross annual income of all wage earners in a home) can afford in relation to the local median-priced home, whether it’s a single-family detached property, townhome or condominium. For the sake of an example, we can use the United States: In late 2019, the U.S. median household income was approximately $69,000 while the median existing house price was $310,000 as of late 2020.
- Median weekly earnings contribute to home value and affordability. Higher employment usually means a more stable home-purchase market. The median weekly earnings for a full-time worker in the United States was $984 in fourth-quarter 2020, which is 5.1 percent higher than this time a year-ago. This is a relevant metric when many single first-time homebuyers want to purchase a house. It’s also something to remember when the news screams that home prices seem way too high.
Given the factors above, consumer home-buying power in 2018 was twice that of 2000 according to First American’s housing affordability education webpage (based on the real estate firm’s “Real House Price Index”). It also says “real” house prices (adjusted for inflation, lower mortgage rates and higher wages) are 36 percent below their housing boom peak in 2006 and nine percent lower than they were in 2000.