What is a homebuyer to do when offering five figures above the asking price, waiving inspection contingencies and making other concessions isn’t enough to win the home of their dreams or at least one of the homes available right now?
While some buyers are simply bowing out, others have begun making desperate decisions, such as offering to name their first-born child after a seller. “It has been hard to convey, through anecdotes or data, how bizarre the U.S. housing market has become,” Redfin CEO Glenn Kelman shared in his latest Twitter thread on Tuesday.
“For example, a Bethesda, Maryland homebuyer working with Redfin included in her written offer a pledge to name her first-born child after the seller,” he added. “She lost.”
1 of 15: It has been hard to convey, through anecdotes or data, how bizarre the U.S. housing market has become. For example, a Bethesda, Maryland homebuyer working with @Redfin included in her written offer a pledge to name her first-born child after the seller. She lost.
— Glenn Kelman (@glennkelman) May 25, 2021
Kelman went onto explain the market conditions pushing buyers beyond the pale, including record-low inventory (-37 percent year over year) and average days on market (17 days) matched with record-high median home prices (+24 percent year over year) and seller premiums (+1.7 percent).
“In two of America’s largest cities, inventory has increased, in New York by 28 percent [and] in San Francisco by 77 percent,” he explained. “San Francisco hasn’t had an inventory increase this large since 2008, and still in both markets, prices are increasing.”
A meaningful inventory boost is far from the horizon, Kelman added while noting the number of new-construction permits are down in some of the nation’s largest cities. “Permits were down 13% in [Washington] DC and New York, 40% in LA, 48% in Chicago, 50% in Seattle, 79% in San Francisco,” he wrote.
Although new-construction permits increased in Miami (25 percent), Las Vegas (56 percent), Greenville, North Carolina (96%), Detroit (122 percent) and Knoxville, Tennessee, (246 percent), it’s still not enough to bring annual home price growth in these areas down from the double digits.
Buyers looking to build a home haven’t been spared from the price crunch either, as lumber futures increase a mind-boggling 300 percent from 2020. Lumber shortages have tacked an extra $36,000 to new-home prices, as economists expect homebuilders to keep shifting the cost burden to already stressed buyers.
“Absent a significant increase in mortgage rates or a Covid resurgence, it is hard to imagine what could cause lumber demand to drop and prices to moderate in the foreseeable future,” PotlatchDeltic Corporation CEO Eric Cremers said according to a previous Inman article. “Builders are reporting record home sales, and they’re going to need that wood to build those homes.”
In addition to construction costs and speeds, Kelman said pandemic-induced migration trends, which have become known as ‘The Great Reshuffling,’ are changing the housing outlook of traditionally affordable secondary markets. The increased competition has priced locals out of the housing market in cities like Nashville.
“The average housing budget for out-of-towners moving to Nashville was $720K, [approximately] 50% higher than locals’ $485K budget,” he explained. “It used to be coastal elites who worried that every adult in the family had to win a career lottery, just to afford a home. Now that feeling may spread.”
States with relatively affordable home prices and lower state taxes will continue to be a target for homebuyers coming from the coasts.
“For low-tax states, 4 people move in for every 1 who leaves. For Texas, this ratio is 5:1 [and] for Florida, 7:1,” he said. “Cities and states have no leverage to raise taxes after many promised new money for social justice [and] the federal government will have to fund long-term investments.”
In addition to lower taxes, the difference between the cost of living on the coasts and more centralized metros, such as Nashville and Dallas, has caused a ripple in the employment choices of Redfin buyers. Kelman said a growing number of Redfin buyers are retiring after completing a move or choosing one spouse to become a stay-at-home parent.
“This migration to lower-cost areas may lead to lower workforce participation,” he said. “For many families Redfin has relocated, the money saved on housing costs lets one parent stop working. A wave of Redfin customers are retiring early.”
This employment shift could push lenders to retighten lending standards similar to the height of the pandemic when unemployment rates rapidly ascended to Depression-era levels.
“Lenders are calling employers to confirm that the homebuyer will have permission to work remotely when the pandemic ends,” he said. “Rates are lower for loans on primary residences, and the lender also wants to make sure the borrower actually plans to work after getting the loan.”
Although the shift to remote working has resulted in infinite possibilities for high-wage workers from the coasts, Kelman said it’s wedged lower-income Americans between a rock and a hard place as the influx of competition erodes affordability for housing and other needs.
“It’s not just income that’s k-shaped, but mobility,” he concluded. “90% of people earning $100,000+ per year expect to be able to work virtually, compared to 10% of those earning $40,000 or less per year. The folks who need low-cost housing the most have the least flexibility to move.”
“An investor recently said, with an ancient touch of awe but also greed, that one source of America’s miraculous economic recovery was the bounty of ‘the land itself,’” he added. “We have more room to grow than we ever imagined.”
“We just have to make sure that benefits everyone.”