The real estate market has been one of the hottest the United States has ever experienced in the last few years. Despite the Federal Reserve increasing interest rates in an attempt to combat rising inflation, the real estate market has continued to flourish as we approach the beginning of 2023, with median home prices in the United States still increasing every month.
Numerous factors clashed, causing the real estate market to become competitive amongst buyers in 2020-2022. First, the COVID-19 pandemic dramatically changed how people and businesses operate. It gave more freedom and flexibility to employees to work from home and avoid coming into the office altogether for an undetermined amount of time.
Second, millions of millennials entered the home-buying age, an already congested buyer market. Third, there has been a supply deficit of housing throughout the country. This has led to the prevalence of bidding wars over limited inventory, with homes often going over their asking price. Lastly, historically low-interest rates increased purchasing power for all borrowers.
Home prices appreciated steadily throughout the 2010s following the financial crisis of 2008. There has been a price increase in median sale price by range as well as the largest cities and the national range.
According to PropertyShark, “Nationally, homes that sold at a median resale price of $275,000 in 2019 [are] rising 35% from their 2009 median sale price of $204,000.00.”
Further, in urban areas, these increases were more significant than 35%. Throughout all price ranges, median home prices exceeded the national average. For properties within the $100,000-$250,000.00 range, the most significant appreciation for properties located in large cities is at a staggering 49% appreciation for the decade (PropertyShark).
Mortgage rates for the first half of the 2010s revolved around 3-4%. Following the 2016 Presidential election, rates slowly increased and at their peak in 2019, went between 3.95% on the low end and 5.34% on the high end (Rocket Mortgage). Everything would dramatically change as the COVID-19 pandemic would seriously alter the real estate industry.
Interest Rates/New Home Buyers
Interest rates reached historically low levels as they dropped to around 3% for a 30-year-fixed-rate mortgage throughout 2020 and 2021, following the Federal Reserve’s loosening of Monetary Policy due to the Coronavirus Pandemic (DallasFed). These rates allowed prospective homebuyers to increase their purchasing power, prompting both new homebuyers and homeowners looking to enter the market to purchase property elsewhere.
Changing Work Environments
The COVID-19 pandemic forced companies to adapt to the changing atmosphere of how companies operate. Allowing employees to work remotely gave flexibility to workers and their families to explore new living arrangements, move away from highly populated urban cities, and relocate elsewhere throughout the country. The pandemic also prompted individuals to retire, moving to new cities and neighborhoods.
Supply Chain Issues in Real Estate
The dramatic surge in the population looking for new homes met a new critical variable, supply. With an influx of people relocating, supply has increased but remains at a deficit of 3.8 million housing units (Bloomberg). The number of individuals looking to purchase properties far exceeded the number of sellers. Furthermore, builders were severely hit by supply chain issues when it came to manufacturing new homes, causing more pressure on the available supply in the real estate market.
Why Real Estate Experts Believe the Market Won’t Crash
The housing market now is considerably different than the real estate market in the mid-2000s. A lot of the issues began in the 1990s when the U.S. Department of Housing and Urban Development imposed regulations requiring Fannie and Freddie to increase the share of their loans to low and moderate-income households.
In 1999, HUD guidelines required Fannie and Freddie to accept smaller down payments and extend larger loans relative to income (University of Wisconsin). Subprime mortgage lenders did not require proof of income and were required to originate loans to individuals who now would be seen as exceptionally questionable at best. These requirements allowed loans to be given to people who could not afford them, causing individuals/companies to be severely overleveraged.
After the Financial Crisis of 2008, stricter regulations for mortgage originations for individuals who borrow money were imposed. According to Forbes, “many loans backed by the government have a certain set of standards, like minimum credit score and down payment requirements. And regulators now expect lenders to verify a borrower’s ability to repay the loan, among other standards.” Increased lending standards have been established as a result, where credit scores and proof of income are scrutinized for potential borrowers before the loan is originated. Thus, people who cannot afford real estate simply are not entering the market.
The Now: The Real Estate Market
Low-interest rates, increased work flexibility, housing supply deficit, and new buyers entering the housing market have clashed and caused a 45% national increase in home prices in just three years (NY Times). Renters have also experienced similar percentage rent increases in their respective communities, but what does this mean for the future of the real estate industry?
The Federal Reserve has dramatically increased interest rates, tightening up on monetary policy in an attempt to curb inflation throughout 2022. At the time of writing this, the average interest rate for a 30-year fixed-rate mortgage is 7.32%, a significant increase from 3.36% in March of 2020 when COVID-19 was declared a pandemic.
New homebuyers who may have been able to enter the real estate market two years ago may find the new market unaffordable to purchase property. Many of the potential new home-buyers in the Millennial/Gen Y generation are unable to enter the real estate market due to being priced out at the present moment. Many renters who want to purchase their own homes can’t afford new homes because of rent increases and inflation, leading to reduced disposable income and savings.
Individuals are still purchasing homes as demand still exceeds supply, but the market is not as white-hot as it was a year ago. This has led to fewer bidding wars and a decrease in appreciation gain that the real estate market was experiencing in 2020, 2021, and the early parts of 2022.
What This Means for Real Estate Investors and 1031 Exchanges
Real estate investors may find this the perfect time to do a tax-deferred 1031 Exchange on their investment property(ies). To get the full benefit of a 1031 Exchange, an exchanger sells their investment property(ies) and then purchases investment property(ies) that is greater or equal to the net-selling price (purchase price of the property that they are selling, minus closing costs and commissions) of the property that they are selling. An exchanger has 45-days to identify up to three properties without any value restrictions from the day they close on their sale and 180-days from the day they close on their sale to purchase one or more properties that they identify. .
Doing a 1031 Exchange now may be very advantageous as the real estate market has slowed down compared to the expeditious time of the 2020-2022 real estate market. Exchangers can look at properties that fit their needs and desires without completely flying off the market if they are not quick enough to make a competitive offer.
For more information on 1031 exchanges, contact Midland 1031 at 239-333-1031, or visit midland1031.com.
Written by Alex Moore
1031 Exchange Department