Buyers face challenging conditions, but can increase their odds with preparation and flexibility.
The spring shopping season — traditionally the time when the greatest number of home buyers are hunting for homes — is shaping up to be a sizzler.
Home shoppers are facing some of the most challenging housing market conditions in generations, including lower inventory, higher mortgage interest rates and heftier prices than this time last year. Moving forward under these circumstances can be intimidating and challenging, but partnering with the right agent and developing a careful strategy could help you beat the odds.
Here are some trends and tips that can help you navigate the market at a tricky time.
The number of homes for sale is at a record low
Despite the steep climb in home prices over the past two years, or maybe because of it, prospective sellers don’t appear ready to sell just yet. For buyers, that’s likely to mean fierce competition.
The number of homes for sale plunged to record lows in December 2021, when there were only 923,000 homes for sale in the United States. The number represents a 19.5% drop in the number for sale a year earlier, and a stunning 40.5% fewer homes than in December 2019, according to a recent Zillow analysis.
Zillow senior economist Matthew Speakman reported in February that it would take only 1.6 months for all of the homes then listed for sale in the U.S. to find buyers, the lowest pace of sales ever recorded by the National Association of Realtors.
Those are tough numbers for buyers — at least for now.
It’s unclear what it will take for prospective sellers to come off the sidelines. In 2021, Zillow research showed that many prospective sellers held off listing their homes due to financial anxiety and general uncertainty, including around COVID-19. Once vaccination rates climbed and the U.S. economy began to quickly recover, listings increased, although they still lagged behind demand.
Prospective sellers this year may be worried about inflation or new variants of the virus. Or they may be concerned about rising mortgage interest rates or competing with other buyers if they plan to buy their next home. They also could be waiting until spring to increase their chances of getting top dollar. What buyers can do: Be clear about your priorities and your budget, and be ready to move quickly if you find an affordable home you love.
Possibilities ahead for new inventory
Although the inventory picture is stark heading into spring, for-sale homes could be added from a number of sources, according to Zillow economists. New construction, aging Baby Boomer homeowners looking to downsize, homeowners who feel more confident moving as signs of normalcy return to daily life, and sellers looking to capitalize on huge gains in home equity over the past few years could be a source of new listings.
It’s also possible that some distressed homeowners who paused their mortgage payments due to financial hardship brought on by COVID will list their homes for sale later this year if they are unable to reach repayment agreements with their lenders. But so far, it appears the federal government’s forbearance program, which allowed homeowners to postpone their mortgage payments, was largely successful in keeping people in their homes and avoiding a wave of foreclosures and distressed sales.
“The good news,’’ according to Speakman, “is that despite very limited selection, buyers are finding ways to get deals done, keeping sales volume elevated heading into the spring shopping season.”What buyers can do: Consider expanding your search beyond your preferred location and keep an open mind about features you want. Stay patient and flexible.
Home prices expected to reach new highs
With record-low inventory, it stands to follow that prices will likely keep climbing as long as there are more prospective buyers than homes for sale.
Home values in January were 20% higher than they were a year earlier, an annual growth rate that represents an all-time high in data dating back more than 20 years. And Zillow economists predict that home prices will be 17% higher in December 2022 than when the year began.
In dollar terms, the typical U.S. home, valued at $320,662 in December 2021, is expected to be worth $375,174 by the end of the year — an eye-popping $54,512 increase. For buyers putting down 20% toward the purchase, the price jump would require them to bring an additional $10,902 to the table.
Further increases could sideline some buyers while motivating others who want to buy while interest rates are still relatively low and before prices increase further. What buyers can do: Consider alternate buying scenarios, including co-ownership with friends or family or buying a less expensive home as an investment or vacation property as a way to get a toe-hold in the market.
Millennials, many with growing families, are fueling demand
A huge wave of millennials is reaching peak home buying years, which is fueling much of the demand that is driving prices higher.
Zillow research shows that significant life events such as marriage, the arrival of children, new jobs and the like, tend to prompt people to move.
Home shoppers looking for homes for their growing families are likely to pay more, according to a recent analysis by Zillow economist Kwame Donaldson. He found that “home values are growing fastest in areas with the highest share of children, reflecting the impact millennial house hunters are having on family-friendly neighborhoods with a shortage of homes for sale.”
Donaldson found that home values in ZIP codes with a higher share of children under age 18 are growing faster than home values elsewhere in the same county, due largely to demand from millennials looking for homes for larger families.
Buyers who have their sights on homes in family-friendly neighborhoods should be prepared to pay higher prices. The possible upside: Donaldson predicted that homes in those neighborhoods will likely maintain higher values for a generation as they raise their children and advance careers.What buyers can do: Prepare financially and emotionally for competition and bidding wars. If possible, continue your search after Labor Day, when markets traditionally cool down as school resumes. You also can wait until more inventory is available, recognizing that doing so involves a degree of uncertainty about whether home prices and interest rates will continue to rise or whether prices might come down as fewer people are able to afford the homes available, especially if interest rates continue to rise.
A little breathing room for buyers
A small piece of good news for buyers is that the pressure-cooker conditions for making a decision could be easing somewhat — at least leading into spring.
In June 2021, the typical U.S. home listed for sale had a sales agreement in one week. By winter (December 2021 and January 2022), the time frame had nearly doubled to 14 days. The added time could be due to slower seasonal trends — people move less in the fall and winter months due to school and holiday schedules.
The trend might not hold beyond early spring, but it could mean some buyers have more time to weigh decisions and make fewer decisions that they’ll regret.What buyers can do: Start building a relationship with an agent early. Agents can get word of homes that might be coming on the market and help you schedule viewings ahead of the competition. Also, look at “stale” listings — homes that have been listed for a while. There may be good reasons for a property to sit on the market, but you could find something that works for you even if it won’t for most other buyers.
Rising mortgage interest rates add to the cost of buying
Mortgage Interest rates jumped about a half a percentage point in January, and then rose to 4% in February. Further increases are expected as the Federal Reserve, the nation’s central bank, seeks to curb inflation.
For most of 2021, interest rates on 30-year, fixed rate mortgages hovered around 3%, dropping at times into the mid-2%, according to the Freddie Mac Primary Mortgage Market Survey®, which analyzes residential mortgage rate averages since 1971. (See here for up-to-date rates and comparison charts).
No one knows how much interest rates are likely to rise. Rates were much closer to 5% as recently as late-2018, and they consistently hovered between 7% and 8% for much of the 1990s. By comparison, today’s rates are still historically low.
In dollar terms, if the interest rate on a 30-year, $300,000 mortgage increased a half a point from 3.5% to 4%, the monthly mortgage payment for principal and interest would increase from $1,347 to $1,432 — or $85 more a month.
If the rate increased a full point, from 3.5% to 4.5% on that same mortgage, the principal and interest portion of the payment would rise from $1,432 to $1,520, an increase of $173 a month. The higher rate may not add up to much on smaller home loans on a monthly basis, but it can add up quickly for larger mortgages and ultimately adds to the total cost of the loan.What buyers can do: If you’re buying with a mortgage, line up your financing ahead of time and be ready to lock in rates when you find your home. Talk with your lender or use a mortgage calculator to determine how much you can afford if rates continue to climb.
COVID-19 variants could add uncertainty to the economic picture
Although many Americans seem eager to embrace some semblance of normalcy, health officials say that COVID-19 will be with us for some time. New variants of the virus, especially those with high transmission rates, could affect people’s ability and desire to move.
The past two years have taught us that we may not be able to control the conditions, but we can control how we respond to them.
If you’re determined to buy this spring, focus on the things you can control. Get creative, get prepared and get ready to move quickly if you see a home you love.
Tips for competing in a tight market
Consider all home types, for the greatest chance of success.
Consider your absolute must-haves and must-nots for your future home, and stick to them to minimize regrets on buying the wrong house or in the wrong place.
Get your finances in order and get pre approved so you can act quickly.
Think of ways to make your offer stand out. You’re likely to be competing against cash buyers. For instance, if possible, consider renting the home back to the seller to give them time to find a new home.
Be aware of the risks in waiving an inspection and other contingencies.
Trust yourself. Don’t get talked into buying a home that doesn’t work for you or that you don’t feel good about. You’re the only one who knows what’s right for you.
Zillow first-time homebuyer resources
The rent versus buy calculator can help you decide whether to buy or keep renting.
The affordability calculator can help you determine how much you can afford to pay for a home.
A mortgage calculator can show you what a home is likely to cost you every month.