5 Main Reasons Why Housing Prices Are Skyrocketing.

5 main reasons why housing prices are skyrocketing
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5 main reasons why housing prices are skyrocketing.

If you’re among the many who have dreamed of making the transition from renting to a single-family home, you are probably among the majority who have been shocked to find out how much home prices cost at present.

With the median price of a home in February 2022 being $392,000 in the United States, there has been little change in the increasing cost of buying a home. While there are many economic factors at play, below is a focus on the 5 main reasons why housing prices are skyrocketing.

COVID-19 and the great exodus

COVID-19 created a unique economic scenario that created a demographic shift and launched the present home-buying craze. First, in light of the pandemic, many urban dwellers with sufficient capital sought to leave crowded and potentially pathogen-transmitting cities (which also tended to have greater public health restrictions) for more spacious and accommodating suburbs.

Simultaneously, stimulus checks that compensated for the potential economic impacts of the overall recession that resulted in lockdowns and quarantines in March of 2020 facilitated home buying while lower mortgage interest rates incentivized home buying.

With less money needed for a mortgage and greater economic stability despite the overall economic adversity, many felt compelled and propelled to head out to buy single-family homes in the burbs. 

 5 main reasons why housing prices are skyrocketing

Remote work and expanding markets

The shift to remote work in March 2020 and the persistence of remote or hybrid positions have continued to compel the surge in single-family home purchases.

This shift has been motivated in part by the demand for greater space to accommodate home offices as well as the desire to accommodate remote working situations with larger backyards and square footage given the inherent confinement.

In some markets, savings from shifting to commercial real estate to remotely-stationed employees has compelled some companies to offer housing premiums to employees seeking a single-family home. 

Additionally, high-tech homes with app-synchronized HVAC and entertainment systems, amid other conveniences, can decrease certain expenses while also making the home more technologically compatible as a home office and a stay-at-home entertainment center.

Given the increase in remotely stationed families who remain out of the office and school, a dynamic home experience appeals more than the confines and potential expense of a rental situation.

Although remote working and employees shifting to single-family homes have not realized savings in every market, the incentive to maintain a functional at-home workspace continues to compel many remote workers to invest in purchasing a home. 

Increased costs of building a new home

Steady construction of the new homes building is one measure that helps to maintain a steady rate of home consumption without greatly increasing overall home prices.

While the initial phases of the pandemic saw a decline in home building rates, amplified by the decade-long stagnation after the 2008 home market crisis, February 2022 marked a 22% increase in homebuilding compared to the previous year.

Despite the increase in demand in the consequent increase in homebuilding, homebuyers still face increased home prices because of the increased costs associated with building a home. 

As of November 2021, building materials such as lumber saw an over 12% increase in prices, with prices still increasing relative to supply-chain disruptions; trade wars over other materials such as steel and aluminium needed in home construction have also contributed to higher than normal home appraisals.

  Amplifying the material shortage is a labor shortage that directly affects the rate of new home construction. Labor shortages were directly linked to lockdowns and quarantines in 2021, however, reductions in the availability of labor continue to delay new home construction timelines, ultimately driving up the cost of newly built homes and contributing to an overall increase in the cost of homes throughout the real estate market. 

Supply and demand

Supply and demand are usually cited as primary components of macroeconomic influencers, and the present home market is no different. Leading the increased interest in homebuying are the 72 million millennials at prime home-buying age.

Complicating matters is the decreased interest in retirees moving to retirement communities or assisted-living facilities. Occupancy rates in senior living facilities decreased 10% since the start of the pandemic, meaning that there are fewer homes available on the market. 

Increasing the complexity of the supply shortage is the rate of institutional investment in home purchasing. With more institutional investors paying cash for homes, which increases the likelihood of home purchasing, fewer homes are available for families looking to buy a home.

Second-home purchases have also seen an increase since the pandemic. With supply constraints such as labor and material shortages increasing the costs of new home construction and fewer pre-existing homes on the market to accommodate the increase of home buyers, the price of homes has only seen an increase to accommodate the market shift.

Inflation

Although supply and demand create a market pressure reflected in the cost of homes, other measures, such as government-regulated inflation rates, also influence the likelihood of a home purchase and overall market prices.

In response to the shutdowns and labor restrictions of March 2020 that compelled interest in maintaining low inflation, the Treasury lowered interest rates, reflected in mortgage loans and the overall consumer price index.

This decrease in rates has led to an increase in lending that has compelled many potential home buyers to pursue purchasing a home. However, the increase in demand ultimately leads to an increase in home prices, ultimately driving up the cost of a home and potentially negating efforts to minimize inflation. 

Increasing the inflation of home prices is the rising cost of rentals in many urban hubs that has compelled higher home prices for those looking to buy a home rather than rent. Given the limited housing options in many urban centers, many potential homebuyers are stuck between deciding on rising rent or hastily investing in a home.

The future of the housing market remains precarious at best, with supply chain concerns, adjusting interest and inflation rates and surging demand potentially leading to another home market bubble bursting.

Until then, the variety of factors that have contributed to increasing home prices to date will continue to drive the skyrocketing costs of homes. 

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