What is Shelter Inflation?
Shelter Inflation refers to the rising cost of housing. While some outlets only focus on the cost of home rentals, it also applies to today’s home buyers, especially since January of this year.
Individuals that are paying monthly rent for their primary residence are all too familiar with the long-term uncertainty of their future rent payments. Most tenants take advantage of agreeing to a year-long lease, but inevitably when the year is up, the current rent amount is replaced by a higher one.
It’s not that the landlords are greedy. After all, they also must follow increasing and ever-changing rules by the local governmental agencies that issue rental certificates. When there is a new regulation that, for example requires a multi-family rental property to have independent separate heating and air conditioning units instead of a common main unit that services the entire building, these costs are ultimately passed on to the tenants.
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Rising Mortgage Interest Rates
It’s been falsely predicted for the past couple of years that mortgage interest rates were going to rise, that is until January of 2022.
A typical 30-year fixed rate principal & interest mortgage payment of $1,200 on January 1st of this year would have funded a $276,777 monthly mortgage. Fast forward to the third week of May, a mere 20 weeks later and that same $1,200 payment only affords a buyer to fund $217,311. That’s almost a $60,000 drop in purchase power all due to a rise in mortgage interest rates from 3.22% to 5.25%.
Rising Home Prices
If the cost of borrowing money was on the rise, you would think that the price of homes would begin to fall as affordability came into question. But that hasn’t happened yet (emphasis on the word “yet”). As someone that watches the real estate market daily, I am constantly amazed that the pricing of homes on the market continue to hover right at record highs. By the end of May, the median list price topped out at $366,655. Breaking this number down, existing resale home prices hit $280,000 and existing condo/townhomes prices peaked in March at $229,950 but ended the month of May at $220,000.
New construction homes median list price is $399,900 and new condo/townhomes is at $324,990 on May 31st. The rise of new construction pricing is more concerning to me because builders must base their predictions on future sales. Builders can add inventory as demand increases, but once they submit zoning plans and pull permits, they are fairly committed to a size and style home. And if the ability to borrow money puts too many homebuyers out of reach for new homes, it will only fuel the existing home base more. So, we may end up with an increase in new home inventory and a drop in existing homes as this market shift continues into the middle and end of the year.
A Slow Rise of Home Inventory is Beginning To Appear
The third piece of the big puzzle is for-sale inventory. I previously mentioned that new construction can somewhat control their inventory by opening new lots for construction as needed. But the resale side of the business that accounts for 78% of all sales is more market driven. If the move-up segment of homeowners began to feel confident that they would be able to find their next home, this listing shortage would correct itself. A weekly conversation with current homeowners goes like this, “I’d put my home on the market in a heartbeat if I knew I had somewhere else to move”.
Even with jump in listing counts in May, I doubt that we will suddenly see a large influx of homes entering the market. Remember, prior to Covid, we were sitting with over 4,000 homes on the market. Instead, we will see what the graphic above is showing. A slow, but steady buildup of inventory. We have experienced a steady drop of for-sale homes since fall of 2019, even before Covid-19 was a thing.
I will predict that when we are beyond blaming Covid for this latest market, we may be able to see that the market was trending this direction anyway and that Covid was simply an event that caused the real estate market to pick up speed for a couple of years.
This Month’s Graphics
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VIA Group REALTORS
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