What in the world is happening with housing prices?

By Kaciana Champlin, RE/MAX Perrett Assoc., Inc.

We can all see it. Maybe you are seeing friends complain on Facebook about housing price while they look for a home. Maybe you are like me and have received dozens of mailers asking about selling and refinancing. Maybe you are unlucky enough to be in the middle of a housing search right now. No matter how housing prices touch your life, what is clear is that prices are soaring. In Calhoun County, prices in the Multiple Listing Service (MLS) have gone up by 9.3% on average, and by as much as 20% in some neighborhoods (data gathered on 3/29/2021). And, with incomes in Michigan only up 3.4% year over year, that makes affordability harder than ever.

What is causing this change in housing prices? It’s the law of supply and demand, which can be explained with a relatively simple metric: Market Saturation. Market Saturation is a formula that REALTORS® use to measure how many homes are on the market compared to how many buyers are actively looking for homes. It used to be the rule of thumb that, for buyers and sellers to have equal bargaining power, we need three months’ worth of homes on the market. That means that if 1,700 homes sold in Calhoun county in the last 12 months, we would want 425 homes on the market to keep prices steady. This is considered the balance point between a “seller’s market” and a “buyer’s market”. 

So, if three months is what we want, what do we actually have? As of March 29th, there were 97 homes on the market in Calhoun county, or about a 3 WEEK supply. In some neighborhoods and districts, there may only be one home in a price range that has 10-20 sets of buyers actively looking. This much demand being unmet is leading to aggressive bidding wars and multiple offer situations, quickly pushing prices up even in historically affordable areas.

This may seem like an issue of people not selling homes. However, when we look at all the housing sales in the last 12 months (1,703) vs all the housing sales in the 12 months before that (1,709) we can see that supply has actually stayed steady. Demand is the problem. With interest rates staying at historic lows, and the Federal Reserve committing to keeping things that way, more buyers than ever are out looking for homes. Lower rates also mean that those buyers that were looking before can now afford more house for the same payments, so prices are being driven up because payments can stay the same as they were in the past, even with a $20,000 higher mortgage.

What happens when demand consistently outpaces supply? Prices go up, but normally so does production. Unfortunately, housing isn’t as easy to make as toilet paper! Between a decline in workers in the skilled trades and increased raw material prices, new homes are not only hard to come by, but often too expensive for the average consumer. While the average sale price of existing homes in Calhoun county is $155,697, the average sale price for the 16 new construction homes listed in the MLS last year was $263,837, with most current new construction being above the $300,000 mark. If the cost of new supply is over $100,000 more than currently available housing, prices still have a significant gap to bridge before the market saturation problem can be solved by new construction.

Really, all of this data is just to show us how this price increase in the last few years, while it may feel like a bubble waiting to burst, is driven by real market factors. The housing crash of 2008 was characterized by bad debt caused by predatory lending and a severe OVER-supply of housing. (With so much money to be made in housing, developers were jumping in left and right). This market will change and soften when we see either a rise in interest rates–which the Fed promised not to do in 2021–or a decline in new construction costs–which will take years for the raw materials to keep up and for the skilled labor force to grow. 

This market is not going to change tomorrow or next week or next month. It worries me how many people I hear saying that they are putting off their housing search until “prices go down,” because unless they want to wait years for the new construction landscape to change, the only reason prices will go down is if interest rates go up, leaving them making the same mortgage payment on a less expensive home.

You can find a list of REALTOR® members at www.bcaar.com.  Our website also includes resources for buyers/sellers, membership information, community resources and much more!  For more information about this article or BCAAR, please visit our website, email us at staff@bcaar.com or call 269.962.5193. 

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