Unless you have been in a complete slumber for the past several months, which actually could have been a good thing in many cases, then you know that the cost of buying a home in recent months has become much more expensive. In Wesley Chapel’s 33544 zip code, typical home values have increased by 12.9% over the past year. Although I agree that supply and demand, along with historically low-interest rates have played a significant part in this perfect storm, there are a couple of other less talked about pieces to this puzzle.
Perceived value, according to the Cambridge dictionary is “the value of a product based on how much customers want or need it, rather than on its real price”. What this means in the current real estate market is that the value of a home has less to do with actual data or appraised value and more to do with how much a serious buyer perceives the value to them. This is why homes are selling for $100,000 above the asking price in some markets. There is absolutely no data to support that purchase price, yet someone perceived the home to be worth it to them.
When you combine that with the influx of folks leaving areas with a much higher cost of living, ie. New York City, you get a lot of buyers with the means to pay more for a home. I recently spoke to one gentleman from NYC and he said that he was paying more in taxes up there than what he was paying for his entire monthly mortgage here in Tampa. I would expect this to continue into the foreseeable future so long as the tax and political policies in those areas remain.
So Rob, what about new construction? Why have those prices been going up so much? That’s easy, it comes down to the two “L’s”, labor and lumber. As reported in globest.com, virtually all costs associated with construction will increase in 2021, according to recent research from JLL, as labor costs tick up between 2 and 5% and materials costs and volatility remain elevated. Prices for lumber and steel have spiked considerably, and JLL predicts demand for materials will continue to balloon over the course of the year as regional economies reopen.
I have personally witnessed a builder raise the price of a particular home, that was only just now having the concrete block walls completed, by 6%, which was $25,000 in this example. I had just visited the site a week earlier with a client. The biggest change wasn’t the fact that it went from 2D to 3D, now with walls, but the price went from $393k to $418k. The first buyer would have enjoyed an increase in equity prior to a roof being installed, should they have pulled the trigger a week earlier.
While I don’t think prices are going down anytime soon, I do agree with Realtor.com’s 2021 forecast that the momentum of home price growth to slow as more sellers come to market and mortgage rates settle into a sideways pattern and eventually begin to turn higher. This at least may be the case for the pre-existing market.
By Rob OConnor