A five-bedroom home with a small yard -- and visibly in need of repairs -- went on my local market in February. I stopped by the open house one Sunday to sneak a peek. By the next morning the "for sale" sign on the front lawn had been replaced with "sale pending." The asking price was $1.275 million, a 55% jump from what the current owners paid in 2017. Based on the fact that the listing was viewed over 5,000 times on Zillow, I'm sure there was a bidding war, too.
This is just one example of the ongoing housing frenzy sweeping the US. The real estate boom from the previous two years, driven largely by record-low interest rates and widespread home relocation during the pandemic, does not appear to be tempering much so far this year. And the busy spring buying season typically commences in March.
Revising its 2022 forecast, Zillow predicts that home values will continue to soar beyond initial projections. The online real estate marketplace company forecasts that year-over-year prices will max out at about 22% in May.
There are several reasons for this ongoing price surge -- some old, others new. I'll lay out what's causing home prices to mount and explain how to improve your chances of buying this year.
6 reasons housing prices keep rising
1. Continuing supply chain disruptions
The slowdown in the supply chain, a problem that began at the start of the pandemic, continues to derail builders' plans for home construction. New construction was down some 4% in January from the previous month, according to the Census Bureau. This is one reason for the shortage in housing supply and sale price inflation.
"The experts were hoping that supply chain issues would clear up and building materials would be coming in faster," according to CNET real estate writer Alix Langone. But since that hasn't really happened, contractors are pulling back and not accepting as many projects, she noted.
2. Low existing home inventory
Existing home sales are also few and far between at the moment, compared to demand. At the end of 2021, the inventory of unsold existing homes dropped to 860,000, a record low, according to the National Association of Realtors.
Researchers at the NAR also found that this inventory shortage is adding to wealth gaps, and that it's particularly tough for first-time buyers and people of color. The current supply deficit means there are roughly 400,000 fewer homes for sale for families earning $75,000 to $100,000 than there were at the start of 2020. To put that in perspective, only one affordable listing is available for every 65 households.
3. Some sellers feel 'stuck'
The lack of housing inventory also impacts homeowners who want to sell but don't feel confident they can afford to make their next purchase in today's ultra-competitive market.
"The market has gotten so intense that if you can't make an all-cash offer or afford to waive inspections, you simply can't compete with people who have those resources. For the average American, selling your home is usually a prerequisite for buying a new one, but the pressure of today's market leaves less time to take advantage of that option for many people," says Langone.
4. Homeowners are tapping their equity and staying put
The benefits of low interest rates and rising property values throughout the pandemic spurred homeowners to take advantage of their home equities through cash-out refinances -- in other words, replacing an old mortgage with a new, higher balance loan. The difference is then doled out to the borrower in cash, which can be used to consolidate debt, or pay for home renovation projects or other big-ticket expenses.
In late 2021, the number of cash-out refinances soared by 33% from the previous year, according to a mortgage report released by Black Knight, a financial services company. If homeowners are banking on their home while living in it, that could explain why they're less likely to sell.
5. Rising interest rates
Due to rising inflation and the Federal Reserve's decision to increase interest rates, the average fixed rate on a 30-year mortgage just surpassed 4% for the first time since the pandemic began. Some economists believe this could continue to drive up home prices.
"Short-term pressure from rising mortgage rates means that many buyers are feeling a sense of urgency to buy now instead of waiting, which is exacerbating competitive conditions, pushing prices up higher and keeping homes selling quickly," says Realtor.com's Chief Economist Danielle Hale.
6. Renting is not getting any cheaper
Many claim that renting a home is "throwing money down the drain" because your monthly rent payments don't build any equity -- they just make your landlord richer. And because of inflation, rental prices are expected to climb this year. In February, the median rent for a one-bedroom in the US jumped up 12%, while a two-bedroom rose by 14%, according to rental listing site Zumper.
Rising rent may further incentive home ownership and drive up home values. In some regions, renting may actually be "less affordable" than owning, according to a 2021 analysis by Realtor.com. Last summer, the company found that in almost 50% of the country's biggest markets, first-time home buying was more financially feasible than renting -- and this the trend may continue in 2022.
5 ways to increase your chance of owning a home this year
1. Get preapproved for a mortgage ASAP
"The best shot at getting the home you want is to be prepared," says Kathy Braddock, managing director with William Raveis in New York City. That means getting preapproved for a mortgage so that sellers know you're serious and feel assured they'll be able to receive the required financing. As a prospective buyer, a preapproval also lets you make an offer sooner in a market where some homes are accepting bids within a matter of days.
2. Avoid major job changes during the buying process
If you're considering changing jobs in the "Great Reshuffle," it may impact your ability to qualify for a home loan. Mortgage experts say quitting a job before closing on a home could jeopardize your loan application, since you have to prove you have the income to support the monthly payments.
3. Consider buying in the off-season
The spring -- the most robust of all the home buying seasons -- is typically when we can expect more inventory and more options. But keep looking in the summer and colder months. Though there may be fewer homes and higher interest rates at that point, there are also fewer buyers, which means prices tend to cool. In the face of less competition, an opportunity might present itself.
4. Go in with your best and final offer
"Don't miss out on the property you love by lowballing an offer," says Braddock. Though you should always work within your budget, she points out that today's market has no patience for back-and-forth between the buyer and seller. If you're pleased with a home, provide your best and final price as soon as possible.
5. Seek intel from sellers
Working with an experienced realtor who has been helping clients throughout the pandemic in your area is also key, because they can give you clues as to the best practices when dealing with sellers.
"Sellers tend to prefer a quick sale, but being flexible with your closing and moving timeline is another way to make your offer stand out," says Hale. "Additionally, putting down a higher earnest money deposit can signal to a potential seller that you're a buyer who intends to follow through, without increasing your purchase price."