Why it Is So Hard to Buy a Home Now and Necessary Strategies for Buyers

“We had no idea how terrible and competitive the Aurora market is now,” Kristin Mallory, 33 Aurora, CO, said. “We have some money and are pre-approved by 3 different banks. Houses that just go on the market have no availability for showings. When you do find something that fits your parameters, you are outbid.”1 Kristin’s experience is far from unusual in today’s housing market. It is tough out there and especially difficult for first-time homebuyers, who cannot pay up too much for a home and who cannot make a cash offer.

In this article, Homeyap will dive deep into the causes of current situation and then provide some strategies for improving the odds of getting your offer accepted.

Sam Khater, chief economist at Freddie Mac says that the U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, according to a new analysis by mortgage-finance company Freddie Mac. “We should have almost four million more housing units if we had kept up with demand the last few years,” Mr. Khater said. “This is what you get when you underbuild for 10 years.”3 In addition, the shortage is especially acute for entry-level homes, which makes it more expensive for first-time homebuyers to enter the market.

Freddie Mac reached its shortage figure by assessing the amount of single-family home building needed to match demand from household formation, second-home purchases and replacements of damaged or aging U.S. homes and comparing that with the pace of construction. The supply shortage poses an obstacle to U.S. economic growth by pushing up housing prices and making it difficult for first-time buyers to enter the market and build wealth, Freddie Mac said. The main reason for the shortage is because of home builders not keeping up with long-term demand growth, Mr. Khater said.³

Home prices were up 15.8% year over year in February (chart below).

HOME PRICES -- 2020-2021

Homeyap has written several articles in the past 18 months about the way the lack of home building during the financial recession and the new post-Pandemic trends have combined into a maelstrom of pain and frustration for home buyers. In June and August 2020, Homeyap wrote pieces entitled “The Urban Exodus Is On” https://www.homeyap.com/post/the-urban-exodus-is-on and “How the Current Housing Shortage Was Created” https://www.homeyap.com/post/how-the-current-housing-shortage-was-created explained how the Great Financial Recession created a shortage of homes and how the Pandemic pushed that condition to an extreme.

The current shortage in homes will be with us for many years. The table below shows U.S. housing starts and population for the 14 years from 2007 to 2020. In the 35 years before 2007, the average annual housing starts in the U.S. were 1.59 million. Using the annual housing starts from 2007 to 2020 and the 35 year average, the cumulative deficit was over 7.5 million homes. In order to compensate for this deficit, housing starts would have to average 3.1 million per year. The highest annual housing starts, since 1970, was in 1972: 2,357,000. So, the odds of housing starts in any 1 year, let alone 5 years in a row, being over 3 million are very, very low. Using 2.357 million as the annual housing starts going forward, it would take until 2030 or 10 years to erase the deficit.

AVERAGE HOUSING STARTS FOR 35 YEARS WAS 1,590,832 (1970-2006)

Homeownership is also low, which adds to demand. The homeownership rate across the country has never fully recovered since the Great Recession. During the period between 2009 and 2014, the homeownership rate significantly decreased in the U.S. The level of homeownership has yet to return to the highs that occurred prior to the Great Recession (chart below). As of 2019, the homeownership rate was estimated to be 64.1%, roughly in line with its level over the past three years. It’s an improvement from the recent low of 63% set in 2015, but it’s still well below the record highs of over 69% in 2005-2006.

HOME OWNERSHIP - 1997-2020

https://www.census.gov/housing/hvs/files/currenthvspress.pdf

Some argue the previous level of homeownership may have been unsustainable. People worry that high levels of ownership precede high levels of delinquencies and foreclosures. However, some of the regulations that followed the housing crisis, including the ability-to-repay rules put the housing and mortgage industries on a much more stable foundation. In addition, consumers are in a far better debt load situation today than they were in 2007. The Household debt to disposable income measure in the 4th quarter of 2007 was 13.21%, whereas it fell to a 40-year low of 8.79% last year.

U.S. HOUSEHOLD DEBT TO DISPOSABLE INCOME – 40 YEARS

https://fred.stlouisfed.org/series/TDSP

If you are a home buyer, there are some constructive ways to improve the probability that your home offer will be successful.

Two things should be kept in mind when deciding on a course of action:

Rules for home buying and selling differ between states, so each consumer needs to be aware of their own state laws.
Also, each strategy involves balancing risk and rewards. Every decision that decreases risk for the seller increases risk for the buyer and vice-versa. Someone must bear the burden of risk in the transaction.

Strategies to make an offer more attractive to a seller:

All Cash Offer - Redfin analysis of thousands of offers made between July 2020 and February 2021 concludes that buyers who can, should come in with all cash. “Homebuyers who offer all cash nearly quadruple their chances of winning in a bidding war,” said Daryl Fairweather, chief economist at Redfin.²
An appraisal waiver - The appraisal contingency allows a buyer to walk away from a deal without losing their earnest-money deposit, if the appraised value of the home falls short of the bid price. Sellers don’t want to deal with buyers who might back out if the appraisal came in low, especially given how high bids could come in above the asking price. These waivers involve risky trade-offs that could cost buyers thousands of dollars or more, and leave them without vital protections should elements of a deal fall through, but they may be necessary in today’s market.
Waive the home-inspection contingency is another risk that a buyer can assume that takes away that risk to the seller. A middle-of-the-road option is to arrange a pre-inspection of the home before submitting an offer. Of course, this means paying the home inspector first and eating that cost, but it can remove a potential hurdle and speeds up the process.³
Increase the dollar amount that triggers the home inspection contingency – If the buyer is willing to accept more fixable problems that arise out of the home inspection, the seller may feel more comfortable with the offer.
Eliminating the financing contingency – This means that the buyers assume the risk if they cannot get a mortgage. They can lose their earnest money deposit, if they decide to back out when they cannot get a mortgage. The financing contingency is the least likely to be waived because the majority of buyers do need a mortgage to buy.
Not using a home-sale contingency – means that if buyers do not sell their home, they are still compelled to go through with the purchase or walk away and forfeit money. Although this creates a huge risk for the buyers, in today’s white-hot market, it may be a consideration. The odds of being able to find a buyer in today’s real estate environment are very good. ³
Offering them a flexible timeline or allowing sellers to rent back the property temporarily after closing - These strategies are lower risk, but certain sellers may find these options very attractive depending on their situation.
Offer to pay a portion of the seller’s closing costs and taxes – This may be a good option for a seller who is temporarily cash-strapped.
Offer to pay part of the seller’s real estate commission – The buyer could offer to pay the buyer agent’s portion of the real estate commission. Buyers should be careful, because this could be a meaningful amount of money (2% to 3% of the purchase price), but that means it is also meaningful for the seller.