LAS VEGAS — Huge demand, limited options and rising rates are adding up to highly competitive housing markets for home buyers this year.
In fact, 2018 is shaping up to be the "most competitive market for home buyers in recorded history," said Danielle Hale, chief economist at Realtor.com.
Hale and other housing expects explored the current matters driving the housing market this year during the National Association of Real Estate Editors conference in Las Vegas mid-June.
These are the four key factors driving the housing market in 2018 and how buyers can best navigate the current environment:
1. More people want to buy
Demographics are a key driver of housing demand. Right now, four generations—Boomers, Millennials, Gen X and, coming up fast, Gen Z—all "exert influence" in the housing market, said Joseph G. Nahas, Jr., 2018 chair of the Counselors of Real Estate, an industry organization, and senior vice president at Equus Capital Partners, a real estate investment fund management company, in Newtown Square, Pa.
While there's no consensus among demographers as to when the generations start or how many people belong to each of them, there's no denying that the Boomers and Millennials are significantly larger generations than the Gen Xers or Gen Zers.
Nahas said more and more people younger than 40 are influencing real estate decision-making today, and they don't all want a job in the city and house in the suburbs, either.
2. There are fewer homes for sale
As the demand to buy has surged, the supply of homes for sale has shrunk.
Plus, fewer homeowners have chosen to sell in part because rising mortgage rates create a "lock-in" effect, said Taylor Marr, senior economist at Redfin, a national real estate brokerage company.
"If you have a 3 percent mortgage, you can't pay the same rate and buy that home [again] today, so people stay in their home longer," Marr said.
3. Builders face rising construction costs, challenges
Builders are stepping up, but government regulations, trade tariffs, tight bank financing and rising construction costs make it harder for them to build more homes.
Some potential homes aren't built because higher construction costs make them unprofitable for developers, Nahas said. That reduces the supply of homes for sale, making buying more competitive for same level of demand and puts upward pressure on home prices.
The "biggest headwind" builders face today is higher prices for softwood lumber, said Robert Dietz, chief economist at the National Association of Home Builders, a trade organization.
One-third of softwood lumber used in the U.S. is imported from Canada. The price of framing lumber has jumped 79 percent since January 2016.
"The lumber tariff has pushed up the cost of a house by $9,000," Dietz said.
4. As mortgage rates rise, housing affordability declines
Buyers today must also grapple with rising mortgage rates. The Federal Reserve last raised its benchmark federal funds rate mid-June and signaled its intention to hike the rate further later this year.
The Fed doesn't set mortgage rates and those rates don't always move in lock-step with the Fed's actions. However, mortgage rates are influenced by the direction of market rates and the Fed's statements about the economy.
"Buyers should assume higher rates on mortgage loans later in 2018 and 2019. This will raise their cost (of owning the home) or lower the amount they can borrow," Nahas said.
Rising rates aren't all bad news, though. Rate hikes indicate that the Fed believes the economy is healthy and unemployment low. Higher rates can help moderate inflation, too, a measure of rising prices of goods and services.
What can buyers do?
So how can buyers achieve their goal of purchasing a new home in such a strong seller's market?
Hale, the Realtor.com economist, said 94 percent of buyers have a strategy that involves staying informed or bringing more cash to the table. More cash might mean a larger downpayment or bigger earnest-money deposit.
Buyers can also cope by downsizing their dreams. That might mean purchasing a smaller or less costly home or one in less desirable neighborhood. Or, some buyers can increase their monthly housing expensive as a proportion of their household budget to buy the home they want.
Nahas advises buyers to pay attention to how quickly homes are selling. If the pace slows, builders might offer more incentives to buyers who are ready and able to purchase a home that's completed or already started, which are also known as “spec” homes.
Buyers should also think about location with one eye on their home's potential resale value. Nahas said locations with job growth, schools, entertainment, shopping and other amenities could attract subsequent buyers and enhance home values in the future.