Average Home Price Hits Record High: Here’s the Impact on Buyers & Lenders

Homes have reached their highest price points ever according to a recent report from Redfin. Compared to this time last year, home prices are up 16%, hitting a record-breaking $331,590.

While it’s important to note that the 16% increase is highly influenced by the pandemic being declared one year ago, there’s nothing changing the fact that prices are truly at all-time highs. And while sellers might be celebrating high sales prices, there are drawbacks.

As prices increase, younger and lower-to-middle income buyers will face tougher challenges to secure a home. Further, with lending practices tightening and greater preference given to buyers with high credit scores, the barrier to entry is only increasing in a housing market plagued with low inventory and sluggish new construction.

Skyrocketing home prices have left many buyers behind.

The four-week rolling average on initial home asking prices flattened at $349,973—an 11% increase from last year. Forty-five percent of these homes are selling within one week, a 12.4% increase year-over-year, demonstrating how hot demand has become.

But the issue in the housing market is not that demand is up. It’s the demographics that have been priced out of the market.

“It’s concerning how much home prices have risen during the pandemic,” said Redfin Chief Economist Daryl Fairweather.

“When the pandemic is over, purchasing a home is going to cost much more than ever before, putting homeownership much further out of reach for many Americans. That means a future in which most Americans will not have the opportunity to build wealth through home equity, which will worsen inequality in our society.”

Millennial homeownership is already down compared to older generations. Despite representing 38% of purchases made in 2020, just 42% of millennials at age 30 own homes, whereas 48% of Gen Xers (and 51% of boomers) owned homes at the same age.

With current housing trends, the gap will only widen as each subsequent generation matures. This belief is shared by The Urban Institute, who reported that household growth will continue to weaken through 2040. Granted, The Urban Institute acknowledges that flattening population growth and an aging boomer demographic will naturally lower the rate of homeownership in the U.S. But a lack of financial upward mobility will continue to show as fewer Americans own and renting rates increase.

Buyer demand ramps up 149% as inventory remains tight.

Redfin’s homebuyer demand index increased 149% compared to this time last year. Once again, last year’s index fell off due to the pandemic, but pre-pandemic demand was still far lower than it stands today.

To complicate matters, as demand remains rampant, the number of homes on the market is decreasing. New listings are down 12% year-over-year and continue to lag behind 2019’s rates. Active listings have also fallen 42%, with just 514,378 homes on the market. Last year around this time, that figure stood at 882,003.

This has been the story for the past year: a hot market fueled by low interest rates with the tightest housing supply in decades. The result is multi-offer listings, a refinancing boom, and more origination volume than you may have been able to handle.

But these positives come with a cost. Homeownership, the great wealth builder, has become a distant dream for many. Housing prices have kept many would-be homeowners out of the market. Add low supply to the equation, and suddenly numerous buyers are locked out of the market simply due to unbearable competition. For example, competition is so hot that a staggering 39% of homes are selling above listing price.

Those with the highest credit scores have benefitted most.

To make things even harder for those with lower-to-middle range incomes, mortgage originations have been heavily skewed towards those with immaculate credit scores. In Q4 of 2020, buyers with a credit score above 760 were responsible for nearly 72% of originations—roughly $840 billion. Everyone else accumulated about $330 billion in originations.

“Housing has become a luxury good,” said Glenn Kelman, chief executive of Redfin. “The economy seems to have officially split in two. There is so much hardship in one part, and then there’s just an absolute mad dash to buy houses in the other part.”

To put things into perspective, the average American has a credit score of 711, according to Experian. The older segment of the population, namely boomers, has an average credit rating of around 736. Millennials, though, the generation entering their home-buying prime, have credit scores averaging about 680 points—80 below the upper 72% of the market and in a segment of credit scores responsible for just $120 billion in origination volume during Q4.

If only the most wealthy and financially stable Americans can afford a down payment and the stratospheric prices of the housing market, then homeownership really will become a luxury good.

Housing worries don’t just plague America.

The pandemic affected the entire world, not just the United States. It’s easy to get caught up in our own politics and economics, but worldwide, countries face serious housing issues similar to the U.S.

For many years, buyers in Europe, Canada, and Asia benefitted from low interest rates, stimulating their economies through access to homeownership.

But those economic policies have come back to haunt policymakers across the globe, as they fear the public may take on too much debt, forming a new housing bubble that would burst if prices begin to decrease and equity shrinks.

In response, many nations tightened their mortgage lending regulations, but with little result. In Shenzhen, China, home prices rose 16% despite stricter lending. The same was seen in New Zealand, where property prices rose 23% year-over-year this past February. Much like us, mortgage lenders overseas have had a hard time keeping up with volume.

Despite the craziness taking place in the U.S. housing market, many American economists remain unconcerned. With most originations granted to those with high credit scores and significant down payments, there’s significantly less risk associated with many mortgages. This trend makes it unlikely that inflated house prices will lead to a situation similar to 2008.

What to make of the mayhem?

Housing supply needs to meet demand. But getting there is rocky.

The White House is preparing a massive infrastructure bill that would include the construction of millions of homes, but when or if that bill will be passed remains in question. Plus, those new homes will be built down the line. That doesn’t solve the immediate pressures of the market.

For now, it’s best to face the purchase-heavy market head-on. Continue to rack up the final refinance originations as the boom wanes and prepare for more purchasing applications.

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