We've spoken to many customers who are irritated with the price of homes at the moment. Some of them have even vowed to hold off on buying a home until the market cools down. There's no right answer to how you should handle a hot market because everyone's situation is different. For sellers, a hot market means you could get a better deal on your home. For buyers, it means you might have to compete with other offers or save up a little more for your down payment. We simply want to give you the information you need to decide what works best for your situation. 

Below are some key terms that you'll need to understand before making your decision.

Key Terms

• Market Value
• Appreciation
• Median Home Price
• Inventory
• Demand

Market Value

The market sets the price of a home. Real estate agents and appraisers use what we call comparables or "comps" to determine home value. Comps use recent home sales in that area that are similar in sq footage, beds/baths, condition, and acreage. If a home of similar standing sold for $300,000 last week in the same neighborhood, the agent might be comfortable listing your home at a similar price. The amount buyers are willing to pay for a home will determine the home's market value. 

Median Home Price

The median home price is similar to the average, but not quite. It's the price of a home that is exactly in the middle of all homes sold. For example, if 100 homes were sold ranked from the most to least expensive, the median price would be the price of the 50th ranked home. Statisticians try to avoid using averages because extremely high or low prices can skew them. The vast majority of homes are sold around the median price.  

In 2019, the median home price was around $275,000 and increased to around $300,000 in 2020. This is an increase of about 8%. In the past, the median home value has increased year-over-year at a 2% to 3% rate. 8% was a pretty big jump. From 2020 to 2021, the median home price jumped nearly 15%, which is almost twice as much as the previous year. 

Appreciation

Appreciation means "to increase in value." Homes are one of the only purchases you can make that may be worth more in 10 years than it is right now. Cars, boats, shoes, etc., almost always lose their value (depreciate) as soon as you take them home. As you saw from the median home price, existing homes will increase in value year-over-year. As long as it's kept in reasonable condition, a home that was bought in 2019 for $275,000 could now be worth $350,000. Every region is slightly different, but if your neighborhood is consistent with national trends, you probably have some equity in your home by now. 

Why are homes so expensive? 

A combination of factors goes into determining the market value of a home. As previously mentioned, home values are determined by how much a consumer will reasonably pay to buy a home. As long as people continue to pay what some would consider being "over market value," houses will continue to be listed at high prices.  So, what factors go into determining market value? 

Inventory (supply)

I'm sure you're tired of hearing this from us, but it really does play a huge role in the market value. Going back to basic economics, supply and demand are the two core factors that set market value. There simply are fewer homes on the market. Between the uncertainty of COVID-19 and low refinance rates, homeowners are holding off any plans they may have to move. 

With the vaccine becoming a factor and many states are starting to resume normal operations, people might become comfortable with moving on with their previous plans. For now, however, inventory is significantly lower than in previous years around this time. Homes are a hot item right now, as many people are searching for larger spaces. Inventory is a major reason why homes are so expensive right now. 

Buyer (Demand)

The other side of the formula is the incredible demand for larger homes. People are working from home or homeschooling their children. Most have discovered that using their kitchen table as an office desk doesn't cut it. Not to mention, they have no extra room to escape their daily lives, so they're ready to upgrade homes. More demand combined with fewer for-sale homes means more competition and bidding wars among buyers. 

Mortgage Rates

All of the advertising about low mortgage rates has sparked the interest of potential buyers who have been on the fence for a while. Those leisurely lookers who said, "maybe one day I'll buy a home" have finally decided that now is the time to act because mortgage rates are at record lows. This adds to the pent-up buyers' demand that only adds to the competition. 

Millennials

The millennial generation has taken over the baby boomers as the largest home-buying group. Millennials took a little longer to commit to buying a home, but they've begun to move into suburban America in droves. Some have decided to build homes rather than purchase an existing one, but that will likely slow down, as the cost of materials has increased due to COVID-19. 

Competition

When demand is higher than supply, consumers will compete to buy the same home. Competing offers means the value could increase. Someone may offer the listing price or higher if it means they have a better chance at getting the house. This cycle continues. As one home in the area sells for above market price, other houses are listed at that price because of "comparables." As a seller, you want to get the best deal, and as long as buyers compete over homes rather than walk away due to the high prices, sellers will continue to list their homes at a high price. 

What does this mean for buyers? 

As a buyer, you'll need to be prepared for competition. Put in the work up-front, and you may be rewarded with an accepted offer in an extremely hot market. 

What does this mean for sellers?

You may have heard someone say that it's a seller's market. Okay, sure, but what does that really mean? It means that sellers are in the driver's seat. Depending on their location, they may get multiple offers on their home and have a buyer by the end of the month. It also means that housing prices are high, so you could get a fantastic deal on your sale. If you've thought about selling your home, now would be a great time to get the most bang for your buck.