It seems like every time we turn on the news, we hear a story about how crazy and competitive the U.S. housing market is right now. Reporters often use phrases like “red-hot” and “hyper-competitive” to describe the residential real estate scene in 2021.
But why is the U.S. housing market so crazy and competitive right now?
As usual, it comes down to supply and demand. Most cities across the country are still experiencing a severe shortage of housing inventory, relative to demand. At the same time, we have seen a surge in home-buying activity over the past 15 months or so.
Any time you have a lot of demand for homes, but not enough inventory to go around, it creates a highly competitive real estate market.
The question is, how long will these conditions last? The housing market has been crazy in 2021. But will that carry over into 2022? Let’s start by looking at current real estate conditions, and then speculate on the possible future.
Here’s Why the Housing Market Is so Crazy Right Now
Why is the housing market so crazy and competitive right now? In a word, imbalance.
For many months now, cities across the U.S. have experienced a serious imbalance between housing market supply and demand. In most cities, there just aren’t enough homes on the market to meet the demand from local buyers. This makes the real estate scene highly competitive, while boosting home prices at the same time.
Let’s examine the supply and demand factors one at a time:
1. An Ongoing Supply Shortage
On the supply side of the, most housing markets across the country are still experiencing a shortage of inventory. In fact, the total number of active real estate listings has declined even further over the past 12 months.
In August 2021, Realtor.com published a housing market update with data for 50 of the nation’s largest metro areas. Their report showed that active real estate listings have declined over the past year, in 48 of those 50 metros.
Only Milwaukee and Washington, D.C. experienced an increase in the total number of active listings. All of the other metro areas saw a reduction in housing supply.
There are several reasons for the ongoing supply shortage within the housing market. For over a decade now, the construction industry has not been producing enough homes to meet demand. And now, in 2021, high lumber prices and labor shortages have exacerbated the problem.
This is one reason why the U.S. housing market is so competitive and crazy in 2021. There just aren’t enough properties on the market, compared to the demand from home buyers.
But there’s a bit of good news on this front. The Realtor.com report cited above also showed an increase in the number of new real estate listings nationwide. So while total inventory is down year-over-year, the deficit is starting to shrink as new listings come onto the market. This could work to the advantage of home buyers in 2022.
2. An Increase in Home-Buying Demand
The housing market was chugging along at a pretty good pace before the coronavirus pandemic started. It came to a grinding halt in April, when the first lockdown measures were introduced. But then it heated back up again, starting in late May 2021.
Since then, we have seen an almost unprecedented surge in home-buying demand all across the U.S. The COVID pandemic spurred a kind of housing boom in the U.S. Suddenly, a lot of people wanted more space, offices for remote work, and other amenities that required a home purchase. This trend sent real estate sales through the roof during the latter half of 2020 and into 2021.
This is another reason why the U.S. real estate market is so crazy and competitive in 2021. It’s the other side of the equation. We already talked about tight supply conditions. Add to that an increase in demand from buyers, and you have all the ingredients for a highly competitive housing market. That’s where we are right now.
Will It Be Less Competitive in 2022?
This is the first in a two-part series that examines current and future conditions within the housing market. Here, we have explained why the U.S. real estate market is so competitive, fast-paced, and “crazy” in 2021. In part two, we will provide an outlook for 2022 regarding the level of competition.
If home prices continue to rise at a steady pace, it will eventually shrink the pool of qualified buyers. This could have a cooling effect on the real estate scene in 2022.
As for now, home buyers should still expect a highly competitive housing market.