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How COVID-19 Has Increased the Cost of Homeownership

Updated Oct 18, 2022

Updated Oct 18, 2022

Home > Home Warranty > How COVID-19 Has Increased the Cost of Homeownership

If you’ve been house-hunting in the past few years, you’ve likely found the process more stressful than exciting. You aren’t alone; folks are struggling to find available properties, and when they do, it’s rarely in their budget. The cost of new homes has risen rapidly since the onset of the COVID-19 pandemic, and the supply of available properties has dropped. The recent real estate disruptions lead many current and prospective homeowners to wonder why this crisis started and when it will finally stop.

Although the economy’s future is uncertain, we know some key contributing factors to the turbulent state of housing affordability in the United States. Before jumping in, check out these must-know statistics about the current housing market.

Must-know Housing Cost Stats for 2022

  • The percentage of the population that owns homes will continue to decrease for the next 40 years, with a projected 21% increase in renters by 2040.
  • U.S. housing prices have tripled in the last 70 years, with median costs jumping from around $50,000 in 1950 to $150,000 in 2019.
  • The past three years saw housing costs increase by well over $100K in some areas, bringing the median cost of a single-family home to around $300,000.
  • Inflation rates – which correlate closely with real estate prices – rose 9.1 percentage points since last year, settling in at the highest they’ve been in over 40 years.
  • House prices may be increasing, but the time properties spend on the market has nosedived. The National Association of REALTORS estimates that 84% of homes sell within 18 days of listing.

How the COVID-19 Pandemic Impacted the Housing Market

The housing market has changed a lot since 2020, and much of that transformation is thanks to the COVID-19 pandemic. However, the public health care crisis was only one catalyst for the many disruptions that followed. Each factor, including the shift toward work from home lifestyles, near-zero mortgage rates, and supply chain crises, ultimately led to the unprecedented home prices we see today.

The following sections will address the impact of COVID-19 on the U.S. real estate market and how other economic drivers have propelled inflation forward since 2020.

More Time at Home

During the coronavirus pandemic, the driving force of housing price growth was the push for work from home lifestyles and shelter-in-place orders. Simply put, people started spending more time at home than ever before, leading them to spend more money on these spaces.

Going out to the bar or booking a last-minute holiday was no longer possible. Instead, many Americans hunkered down at home, often eating, sleeping, playing, and working within the same four walls. The increased time spent at home led to a rapid increase in expenditure on home-related items. People began transforming extra bedrooms into home offices and realizing their studio apartments suddenly felt a little too cramped. For this reason, they began searching for newer, bigger, and better housing options.

A big push to buy came from the millennial population, a group historically known to choose renting over owning. People ages 25 to 40 jumped at the opportunity to buy their first single-family homes instead of continuing to rent. They moved away from high-cost, densely populated cities like San Francisco, New York, and Washington, D.C., to cheaper, suburban, and rural locations.

The novel remote work environment made such movement more flexible than ever. Folks flocked to other areas of the country, able to easily pick up and move their lives as long as they had a work laptop and Zoom app in tow. No longer were people tied to locations because of jobs, encouraging many to buy new homes elsewhere.

This 2021 study from Census.gov and Zillow explains more about the connection between remote work and homebuying decisions.

Low Mortgage Rates

While people adjusted to their new remote lifestyles, mortgage rates lowered everywhere – a direct result of the COVID-19 outbreak.

In 2020, the United States Federal Reserve lowered interest rates to boost economic growth during the oncoming threat of a pandemic-induced recession. Mortgage rates fell to record lows, prompting many Americans – even those not particularly interested in buying – to jump into the real estate market.

The increased desire for enhanced home spaces coupled with these plummeting mortgage payment requirements encouraged first-time homebuyers to take advantage of historically low rates. People who had been renting for years bought homes with monthly payments lower than what they’d pay to rent a space half the size.

At the same time, however, many existing homeowners were reluctant to sell – especially during the peak of the pandemic in 2020. The start of the COVID-19 outbreak was an undoubtedly uncertain time, and a large percentage of the population simply wanted to hunker down and stay put. This stagnance of reluctant sellers likely contributed to the discrepancy between housing demand and available supply.

Low mortgage rates were good for Americans looking to invest in property and build their wealth for cheaper than pre-pandemic levels. However, the surge in home sales quickly led to a shortage in which there were more prospective buyers than number of homes available.

Supply Chain Issues

According to the National Association of REALTORS, there are currently around 1 million available homes for sale compared to four times that many 15 years ago. This discrepancy in housing supply and demand has produced real estate bidding wars in which multiple buyers scramble to make the highest bid, and properties’ sale prices far exceed their original market values.

The prominence of bidding wars in America’s real estate market has raised collective housing costs nationwide. Many potential buyers are drastically lowering their standards on what truly defines their “dream home.” Meanwhile, they’re raising their price limits, often exceeding budgets by over $100,000, just to find available properties.

Unfortunately, supply and demand issues are occurring on a scale far larger than just the U.S. real estate market.

A global supply chain crisis ensued in 2020 with the start of the coronavirus pandemic. Folks stuck at home spent the money they would have saved for vacations and recreation on new home supplies like furniture, appliances, and smart gadgets. Meanwhile, manufacturing companies were at a standstill, struggling to operate around stay-at-home orders, sick employees, and huge profit losses.

With cargo ships and shipment vehicles stuck in a supply chain bottleneck, building materials became increasingly difficult to find. The housing shortage intensified as builders found themselves unable to source the materials needed to construct new homes.

This disruption sent prospective buyers rushing to snag existing homes to avoid waiting months, if not years, for shipments of building materials. As you can imagine, the influx of buyers avoiding supply chain disruptions further contributed to the supply and demand issues in the real estate market.

What the Shift in Housing Affordability Means for Buyers

Increased housing costs and the “hot” real estate market have made homeownership unattainable for many Americans. Homeownership is now an exclusive club that buyers can only enter if they have spotless credit scores, steady employment, and the ability to offer excessive down payments.

One attractive aspect of owning is the ability to call a place your own, with no control from a landlord or inconvenient rent increases. However, this is in no way the most important part of homeownership.

The Consumer Financial Protection Bureau states that a home is among the most crucial financial assets someone can have. Homeownership is a critical step toward developing intergenerational wealth and building long-term credit. If barred from homeownership due to high housing costs, people lose the opportunity to invest and build equity.

According to the Urban Institute’s 2021 homeownership report, home equity represents nearly half of the average American homeowner’s net worth. This means that those unable to buy a home are at a huge disadvantage in building equity and assets. With the path to wealth-building barred from many low-income borrowers, young Americans, and minority communities, the long-standing wealth gap cleaves further apart.

Looking Forward

Mortgage rates are back up, and sellers are listing like crazy – factors that typically lower housing price points. However, home costs are still surging, leaving many economists wondering if we’re heading toward another Great Recession. This theory isn’t unfounded; the Mortgage Bankers Association says there’s a 50% chance the U.S. economy will dive into recession within the next year.

Even if the overall economy stays above water, the housing market may plunge into a recession of its own. Median wage increases are still 3% behind inflation rate increases, putting more financial strain on renters, hopeful buyers, and homeowners alike.

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