by Dana George | Published on Aug. 11, 2021
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It's easy to find reasons the housing market could keep sizzling over the upcoming months.
As financial writers, we keep our eyes on the market and gather information from as many sources as possible. That helps us see trends. Naturally, we can't see into the future or know for a fact what will happen next, but our educated guesses are based on experience and knowing where to look for answers.
No one knows if there's another pandemic around the corner, if a war is about to break out, or if anything else will upend our current assessments. But based on what we know today, here are five reasons we don't see the housing market cooling down soon.
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The current buzz around the water cooler is that the Federal Reserve might raise the prime interest rate to prevent inflation. While the prime rate is not the interest rate we pay on a loan, it is the foundational rate upon which banks set their interest rates.
As of this writing -- despite speculation -- there is no indication that the Fed plans to increase the interest rate. In fact, they have indicated that they expect to keep the prime interest rate near zero through 2023. And as long as the mortgage interest rates remain around 3%, mortgage loans will be in high demand.
It's no secret that there are still more potential home buyers than properties for sale. At the current sales rate, it would take five weeks to sell every home on the market in Austin, Texas. Because of low inventory across the country, there's a backlog of buyers hoping to snag a property they love.
Millennials are not the only people buying homes, but they are driving demand for new mortgages. As the largest generation (now surpassing baby boomers), millennials are finished with school, building families, and looking for places to put down roots. Over the past three years, millennial homeownership has climbed from 40% to 47.9%. According to First American Financial Corp., they are likely to be responsible for 15 million home sales over the next decade. The desire for homeownership does not appear to be going anyway in the U.S., and millennials are just finding their stride.
When we look at markets like Austin, San Jose, or the scorching-hot Manchester, New Hampshire, it's easy to recognize the need for new housing. The current price of building materials makes it difficult for builders to earn the profits they need to stay afloat, which equates to a slowdown in new jobs. The labor shortage has also added to builder woes, meaning it will be some time before new builds ease the lack of available housing.
According to the National Association of Realtors (NAR), pending home sales jumped by 8% in May compared to April. Further, they were up 13.1% over 2020. COVID-19 was clearly a factor in 2020, but pending sales are still considered a "forward-looking indicator" of how healthy the housing market is expected to be in upcoming months. A pending sale indicates that the seller has accepted an offer on their home but may wait for a higher offer to come in. For this reason, it's often one or two months before a pending sale becomes a legitimate sale. If pending sales are up, it's a good indication that the market is robust.
Although we can't say for sure how long inventory will stay low or demand will remain high, we can say that we don't bet on a cool down anytime soon.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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