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Why home prices are still sky high and what you can do if you're looking to buy

Here's why home prices are so high and what you can do while you wait to buy.

courtneyk | E+ | Getty Images

The pandemic has flipped the real estate market on its head, and it has left many prospective buyers further away from becoming homeowners as they struggle to afford the rising costs.

This unprecedented sellers' market is the result of a myriad of economic factors, including record low interest rates from the Federal Reserve, a lack of homes for sale and a slow down in the number of new homes being built due to labor shortages and rising costs of construction supplies.

As a result, real estate prices have skyrocketed. In Q4 2019, the average home sale price was $384,600, according to the St. Louis Federal Reserve. In Q2 2021, it was $434,200, an effective 12% increase in the span of six quarters. For context, the previous six-quarter span saw a mere 2% increase in sale price.

Higher prices have left many with diminished hopes they will ever become a homeowner. But there is a a very good possibility that home prices will level out. And there are still plenty of ways to save for your dream home while you wait.

Here's what you need to know if you're thinking about buying a home in the near future.

Interest rates could rise at any moment

Federal interest rates dropped from 1.58% in February 2020 to near zero in April 2020 amid the pandemic shutdowns. Melissa Cohn, executive mortgage banker of William Raveis Mortgage, says a dramatic shift like this could happen again, and happen quickly.

She projects interest rates will begin to rise when one or more of these scenarios occur:

  • The Covid-19 delta variant is under control. "Once we start talking about something else, rates will go up," she says.
  • The federal government recognizes "full employment." Cohn suggested that the upcoming Aug. 2021 jobs report from the U.S. Department of Labor will be a key indicator if employment numbers are returning to normal. At the height of the pandemic, unemployment neared 15%. The July 2021 unemployment rate was 5.4%, and Cohn suggested 4% may be the key number the Federal Reserve is looking for when considering whether to raise interest rates.
  • Employees begin working from their offices again. As more companies announce extended remote-work policies because of the delta variant, Americans are more apt to continue home shopping, and they've been willing to pay more for the house they want. Once employees return to office, Cohn suggests the housing market will cool as there will be less demand. With less demand, mortgage interest rates will likely go up.

While record-low interest rates have been enticing for many Americans looking to take out a mortgage, some real estate investors argue consumers should be cautious, as real estate prices always fluctuate with interest rates.

Salvatore Rich, 27, of Phoenix, has purchased a primary home and several investment properties in the last few years in Arizona and Tennessee. His home purchase strategy focuses on value and opportunity, rather than fluctuating prices and interest rates. "You'll never catch the top or bottom," he says.

Mortgage forbearance, eviction bans are ending soon

There may be a "trickle effect" of more homes coming onto the market soon, says Cohn.

In June, the Federal Housing Finance Agency (FHFA) extended mortgage forbearance on homes with federally backed mortgages until Sept. 30, 2021. This is the third extension of this program, and it's unclear if this will be extended again.

On Aug. 3, the Center for Disease Control (CDC) extended the federal eviction ban through Oct. 3, 2021. This has been extended multiple times but has been challenged by many in courts across the country, questioning its legal footing. On Aug. 13, a federal appeals court declined to block the new eviction moratorium enacted by the Biden administration, which will likely make its way to the Supreme Court.

With these policies possibly ending in the next few months, Cohn predicts there will be a number of properties, both rentals and for purchase, coming onto the market, easing housing prices.

Pandemic-related supply chain issues are freezing new home construction

The pandemic is affecting much more than just interest rates — it's driving home construction prices to record highs.

According to the U.S. Census Construction Price Index, home-building prices have gone up 13% from June 2019 to June 2021 for single family homes. This takes into consideration the entire building cost, including the value of the land.

Building material costs also soared 26.1% on average from June 2020 to June 2021, according to the National Association of Home Builders. This also doesn't account for the shortage of construction labor, further constricting the development of new homes.

And the semiconductor shortage that has crippled the supply chain for cars has also caused issues in the home-building market. Appliances, including refrigerators and stoves, are on backorder for several months because of the chip shortage. The lack of appliances is causing a delay in home sales, or for houses to be sold incomplete, squeezing home supply even further.

What you can do to best prepare yourself for a home purchase

While the housing market is extremely competitive, and there's still a lot of uncertainty for what's to come, there are several steps you can take to prepare yourself for a future home purchase.

  • Create a budget to ensure that home ownership is within reach for you.
  • Save up for a down payment using a high-yield savings account so you can earn additional interest on top of your initial deposit. Select rated the American Express® High Yield Savings Account as our top pick for best accounts from a big bank thanks to its higher-than-average interest rate and 24/7 customer support.
  • Make sure your credit score is as high as possible before applying for a mortgage. The higher your credit score is, the better terms you can get on your mortgage (including a lower interest rate). You can use a credit monitoring service to better understand your credit score. Select rated CreditWise® from Capital One the best overall credit monitoring service. You do not need to be a Capital One cardholder to use the service, and users receive updated credit scores and updates from the three major credit unions regularly.
  • Get pre-approved for a mortgage before you start your home search. By doing this, you will know exactly how much you are able to spend, and you can see how much your monthly payments will be.

Home shopping can be a stressful experience, especially with the current competitive environment, which often features multiple bidders for one home within days of it coming on to the market. Cohn suggests to keep it simple, and "to find a house that will suit your needs."

American Express National Bank is a Member FDIC.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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