The last 18 months in real estate have been a wild ride. Average sale price is up by double digits, new listings are selling like hot cakes, and there is extreme competition among buyers. The pace and frenzy of the market have been both invigorating and daunting. The balance between fear-of-missing-out and market fatigue dictates buyer, seller and realtor behavior.
One thing we know for sure is that these conditions won’t last forever. This market will change. But when?
In addressing that question, it’s important to first appreciate the driving forces of today’s market. Since the pandemic began, government stimulus to the economy has resulted in many people having more money to spend – and one of the main places they have been spending it is in real estate.
The desire for residential housing both as sanctuary and retreat during COVID — not to mention functioning as a home office, home school, home gym, etc. — has bolstered both primary and second-home purchasing. Persistently low interest rates continue to spur the impulse to purchase as well. These factors, on top of a systemic 10-year shortage of available housing inventory that has grown year after year, have all helped lead to today’s imbalance between supply (available listings) and demand (active buyers).
So, if the question is “when will things change?” the answer is “well… it depends.” Here are three things we will be watching as we move forward:
While government stimulus spending is likely to lead to inflation and upward pressure on interest rates, rates have stayed low so far. This is largely due to the U.S. bond market still being a relatively attractive place in the eyes of investors from around the globe. Rates may tic up a bit, but they appear poised to remain near our current historic lows.
Affordability also may cause a shift in buyer behavior. So far, people are prioritizing housing near the top of their budgetary hierarchy. That has meant the demand side of the housing market is strong, even in the face of rising prices. How much rising incomes are able to keep pace with the rise in housing values will be a key factor in how long this trend can persist. For now, interest rates, money supply and modestly increasing incomes seem to be overcoming any acute concerns about affordability.
Increased Investment in Residential
The rise of vacation rentals (think Airb&b and VRBO) has meant increased demand for residential real estate. The popularity of vacation rentals among travelers appears to have potential for even further growth. As it grows, investors will continue to look for properties to buy to meet that demand. Investment in residential real estate will continue to be a factor in steady demand and value increases.
So, what’s the message? Considering these factors, we see a robust West Michigan real estate market continuing its current trend for the next 12 to 18 months. Even as some of the above factors shift and we continue to move back toward a less frenzied market, the medium term to five years looks like it will shift to a more gradual increase in values – but not a drop in values. For those with changing real estate needs, it will remain a good time to take advantage of solid equity positions and favorable interest rates.