Buy a house during COVID-19? The housing market is a tale of two Americas and first-time buyers are struggling

·8 min read

After five years of carefully saving money for a down payment on their first home, Christine Rodriguez and her husband, Oscar, hoped to finally move out of their rented trailer in Des Moines, Iowa.

The pandemic made their need more urgent. While five of their six kids were studying online from home, the three-room dwelling started to feel untenable.

The children, ages 6 through 17, couldn’t even freely play outside.

“When you live in a trailer, your neighbors are so close," says Christine, a waitress at a sports bar. "We have a yard, but it's not too much. We just wanted them to be able to go out and just be kids, like, you know, screaming and yelling and just having fun playing and not bothering other people because we're so close.”

Christine Rodriguez's real estate agent, Tiffany Ehler, right, says she's never experienced such an overheated housing market in Des Moines, Iowa.
Christine Rodriguez's real estate agent, Tiffany Ehler, right, says she's never experienced such an overheated housing market in Des Moines, Iowa.

After contacting a real estate agent to look for starter homes in the $150,000 to $220,000 range, Rodriguez found about 25 listings that interested her. Ten were gone before she could make an appointment to view them, and the others were snapped up within hours of her visiting.

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“We don't even have time to process or think, and they're like, 'OK, it just sold,'" she says, adding, "It doesn't feel like there's anything out there or, if there is, I feel like some of them are priced way too high and the sellers aren't willing to come down at all.”

Rodriguez’s experience reflects a national trend. The number of homes sold nationally in the $100,000-$250,000 range fell by 11% in February from a year earlier, the National Association of Realtors told USA TODAY. In the less-than-$100,000 price range, the percentage of homes sold dropped by 26%. Homes sold for more than $1 million rose by 81%.

Usha Subramaniam, a real estate broker for Compass, listed a home in Mount Kisco, N.Y. She says pricier homes used to linger on the market for years.
Usha Subramaniam, a real estate broker for Compass, listed a home in Mount Kisco, N.Y. She says pricier homes used to linger on the market for years.

In the red-hot pandemic housing market, where prices have risen across the board, the ability to purchase homes seems proportional to the price range – the higher the price, the greater the sales. Growth has historically been similar across price tiers, but that has diverged during the pandemic.

Take Chappaqua, New York, which is 35 miles north of midtown Manhattan and a hamlet where Bill and Hillary Clinton live. Two years ago, homes priced at more than $2 million would sit on the market for a long time, says Usha Subramaniam, a real estate broker with Compass.

In 2019, two homes sold for more than $2 million. Last year, in the middle of the pandemic, that number jumped to 17. This year, 17 homes in that price range had sold or were in contract by April.

Wealthier Americans are buying up pricey, larger properties in places such as Chappaqua because they want houses with offices, gyms and other amenities while they and their families work and entertain themselves from home during the pandemic.

“They want move-in-ready homes," Subramaniam says. “They want the big white kitchen. They want the big family room. They want a huge master bathroom. In other words, they want a classic grand house. If they're going to leave the city, then they want to have it all here.”

A divergent housing market

Lower-priced homes, where sales have decreased, tell another story about the economy.

The decline in their sales is not due to a lack of demand, experts say, but rather a combination of low inventory and increasing prices caused by fierce competition. As a result, it's harder for many Americans to buy their first homes, and that missed opportunity can widen the wealth gap, economists say.

"It is clear that homeownership is one of the most successful and biggest sources of wealth creation, particularly at the lower end of the income spectrum," says Mark Fleming, chief economist for First American. "They don't own a home, and therefore they cannot generate the wealth."

Home prices soar

U.S. home prices rose in February at the fastest pace in nearly 15 years as strong demand for housing, low mortgage rates and a national housing shortage gathered momentum.

The February S&P CoreLogic Case-Shiller U.S. national home price index, released Tuesday, rose 12% from a year earlier, the biggest gain since 2006.

"The housing boom will continue through 2021. … The run-up in house prices will erode affordability, particularly for first-time homebuyers," says Abbey Omodunbi, a senior economist for PNC Financial Services.

Omodunbi notes that the passage of the First-Time Homebuyer Act, which would provide a tax credit for rookie buyers, should support demand from people looking for their first property.

Prices of the country’s most affordable homes rose 16.5% year over year in the first quarter, and luxury prices saw a similar gain (14.7%), according to an analysis by the Redfin real estate brokerage.

In January, the 30-year fixed mortgage rate, the most popular home loan product, sank to its lowest level on record, to 2.65%, according to mortgage finance company Freddie Mac. Mortgage rates set record lows more than a dozen times last year.

Although rates have ticked up, they remain near all-time lows, at 2.97% for the 30-year fixed mortgage. That’s down nearly 2 percentage points since November 2018, when rates stood at 4.94%.

"People are able to buy higher-priced homes because they have the purchasing power driven by low mortgage rates," Fleming says.

Compass Real Estate lists a home in Mount Kisco, N.Y., for $2.7 million.
Compass Real Estate lists a home in Mount Kisco, N.Y., for $2.7 million.

These rates are typically for buyers who bring strong credit scores and large down payments to the table. First-time homebuyers face stricter lending requirements as lenders want to ensure that borrowers can still make their mortgage payments after a historic wave of layoffs.

Mark Stark, CEO of Americana Holdings, which owns Berkshire Hathaway HomeServices Nevada Properties, Arizona Properties and California Properties and has 3,500 agents in the three states, says he’s seen first-time buyers struggling to make successful offers.

“I have seen traditional buyers who are well-qualified being squeezed out. … They don't have such additional cash to put down,” he says. “They also lose out when they're going against a cash offer, which is simpler for the seller.”

Housing shortage

Another reason for the low supply of affordable homes is the cumulative effect of builders not putting up enough homes since the last housing crisis – when many went bankrupt, says Lawrence Yun, chief economist for the National Association of Realtors.

The U.S. housing market shortage increased to 3.8 million units by the end of 2020, according to data from Freddie Mac.

"Builders have focused on luxury homes because of higher margins," Yun says.

A number of factors have contributed to the lack of available housing, says Robert Dietz, chief economist for the National Home Builders Association. The cost of building a single-family home in the affordable price range, for instance, is more challenging because of regulatory requirements, such as town permits, higher lumber costs and exclusionary zoning laws that prohibit homes to be built on small lots.

“You can see quickly how difficult it is to build, say a $250,000 house in California,” Dietz says.

Lumber prices have soared nearly 200% since mid-April 2020, increasing the average price of a new home by $24,000, he says.

“Lumber price spikes are not only sidelining buyers during a period of high demand, they are forcing builders to put projects on hold at a time when home inventories are already at a record low,” he says.

The supply shortage in the luxury market is less severe than in other price tiers partly because more high-end homeowners are putting their properties up for sale. New listings of luxury homes grew 15.8% year over year in the first quarter, while new listings in most other price tiers declined, according to the Redfin report.

First-time buyers face uphill challenge

Tiffany Ehler, a real estate agent in Des Moines, Iowa, where the average median home price is $235,000, says she’s never experienced such an overheated market.

“The Midwest market typically is very steady. This is the first spring that I honestly feel like there's just so much demand, it's leaving us scrambling," she says. "Anything $250,000 and below is literally selling in seconds.”

Sellers are looking at some new strategies.

“When a listing comes on the market, the listing agent will put right in the comments that no offers will be accepted for the next three days,” Ehler says. “And that actually will allow the buyers a chance to get into the property. They will look at all offers on the day they pick and will want the highest and the best offers, so there's no negotiating at the same time.”

Amid the bidding wars and high prices, the appraisals often do not come in at the offered purchase price.

“All of a sudden, people are scrambling because now buyers can't get the property at that price because the lenders will not lend on that amount of money,” Ehler says. “So that's not good for sellers, and that’s not good for buyers.”

Ehler says she is concerned about buyers waiving inspections to stay competitive with their offers. “You're talking about a potential first-time homebuyer, then you get into the property and you may have some surprises that you weren't prepared for,” she says.

Ehler started working with Christine Rodriguez, the mother of six who lives in a trailer, after Rodriguez didn't to have any success with her first agent.

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Rodriguez says the process has been frustrating. Each time she goes to view a house, her children get excited, but she eventually has to give them the bad news.

"They have waited for a long time. I am just looking for a three-bedroom house, a big enough kitchen to put a dining table so we can all sit and eat together,” she says. “I just want my kids to have a bigger yard and just be able to move around freely.”

Contributing: Jessica Menton

Swapna Venugopal Ramaswamy is the Housing and Economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal

This article originally appeared on USA TODAY: Trying to buy a house during COVID-19? Here's why it's so hard

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