Housing prices have continued to rise in addition to soaring interest rates. This epidemic is causing homes to become increasingly unaffordable.
During the coronavirus pandemic, the interest rates dropped, averaging 2.68% (30-year fixed). Real estate agency Dart Homes owner and leader Nathan Dart believes that “it was not the pandemic that directly] caused the prices to go up [but] the competition” due to the low interest rates. Altogether, this created massive demand, resulting in inflated housing costs. Interest rates rose to about 6.84% (30-year fixed), making buying homes no longer affordable.
Interest rates are significant for large purchases, a $270,000 house at a 2.68% interest rate would cost about the same as a $200,000 property at the current rates, a $70,000 difference. “[At the lower interest rates], it is cheaper to buy a house than rent a property,” Dart said. When people rent homes, they are not building equity and are losing money, and the low rates during the pandemic allowed people to avoid this issue by buying a home.
As the world shifted to virtual work settings, many people felt the need for change, specifically in their housing. Further contributing to the demand for new homes. Senior software developer at Dovel Technologies Sharda Jayana was interested in buying a new home for her family. “[I’m currently] living in a townhome and looking for a single-family house,” Jayana said. She cited being at home more and wanting a bigger space as motivations for her search.
During the pandemic, they placed several home offers, but competition outbid them. Ms. Jayana adds that currently, both “the interest rates and the house prices are high,” and to reconsider buying a home, either must come down.
President of Classic Homes of Maryland Dinesh Jain mentions how “the surge in demand put a lot of pressure on the company” and “even understaffing” during the pandemic due to increased demand. They have recent sales slow due to the higher interest rates. He added that it is not all bad because people now have more options for new homes in a more stable market.
Not only are actual home prices rising, but the cost of building new homes is too. The price of building homes increased significantly over the last two years. “At the end of 2020, the price of lumber went up about 15-20% monthly,” Jain said.
The costs have recently stabilized but have yet to decrease. Supply chain issues also caused price ups, as getting appliances in time has been an issue for home builders. Jain said, “[They] don’t have all the needed product to finish a house.” Due to supply chain issues, builders must add temporary products, which they change out later.
Additionally, this has been advantageous for people who already own homes. “We’ve already seen a 20% increase in property value in two years alone,” said Dart. People like this also had the opportunity to refinance to a lower interest rate and had advantages over those who did not. Yet, at the same time, this is a significant disadvantage to new buyers.
The future of the home market is uncertain. Interest rates fluctuate, and the economy has historically been unstable. Janaya adds that “though the prices have increased, it is not yet a comfortable buy,” while Jain mentions that when buying new homes, the most important things to consider are “quality and location,” and with the slow market, people can get the home they desire.
Montgomery County already has high housing prices, which are even higher during inflation, and many hope for a future with more affordable housing.
Written by Dhruv Narang of Landon School
Graphic courtesy of Katherine Hua of Thomas S. Wootton High School