If You Buy in This Real Estate Market, Will You Get Burned?
Buying a home in today’s seller’s market can feel like a gamble, but Alex Krumm expects that the odds are in your favor. “My bet is home prices will continue on an upward trajectory,” the president of the Realtor Association of Sarasota and Manatee says.
Although Krumm doesn’t think home values will appreciate at their current pace (they swelled by roughly 30 percent between June 2020 and June 2021), he says prices will continue on an upward bend. The pandemic has “turbocharged prices,” he says. Part of that is due to high demand—Krumm is seeing four times the demand for homes compared to years past—and low inventory. Buyers in March 2020, for example, had roughly five times more houses to choose from than in March 2021.
A few trends will start to moderate price increases, though.
The first is that homebuilding will pick up. Post-pandemic builders faced manufacturer shutdowns, interruptions in supply chains and sudden spikes in the price of materials. Builders put a pause on housing construction since they couldn’t pin down their profit margins.
“If they don't know what their total cost is to build, they don't want to get locked into having to deliver a previously guaranteed home,” says Krumm. “When supply chains reopen and prices shift again, they’ll be able to do more to keep pace with the market demand with a return to normalcy, which hovers around a 6 percent to 8 percent price increase year over year in Florida. Right now, demand is the highest I've ever seen it.”
Homes are selling in five days, on average. “I can't necessarily forecast a reduction in home prices,” says Krumm. “But the supply chain will allow builders to build at a faster rate at a lower cost, so we'll see more competition among builders.”
And more of those builders may come from outside the market, as they look at our turbocharged land prices. According to a July report by realtor.com that looked at cities where land values nationwide have risen the most since the start of the pandemic, Sarasota topped the list with a 92 percent appreciation. The report says this has led to heightened interest from builders who have their eye on markets behaving like Sarasota’s, where move-in-ready developments are in high demand and rents are fetching record high prices.
Inventory also started increasing this summer. August 2021 marked the first month since the pandemic started that there were more listings than sales. Normally that leads to more competitive pricing, but Krumm cautions that doesn't mean this larger inventory will last. “We want to see something for at least three months before calling it a trend rather than a fluke,” he says. In the short term, according to Krumm, we can expect bidding wars to continue, especially when it comes to cash buyers. Krumm says cash sales more than doubled from 2020 to 2021.
Another factor in determining future home values would be an uptick in mortgage interest rates, which have remained historically low. Contrary to what one might expect, when rates go up, it prods buyers into action, especially in markets like Sarasota, where buyers often lean toward the affluent. “In the beginning of the year, rates ticked up a little, and it scared buyers into thinking, ‘If you don't get in now, prices will continue to increase,’” says Krumm.
Will there be a bust? Don’t expect any price plunges like we saw during the Great Recession. Foreclosures are unlikely “because people have so much equity in their homes, they won't want to walk away from them,” says Krumm. “I expect prices to continue to rise, and residential prices are going to be permanently higher than they were two years ago.”