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Rising Inflation and the Long Island Housing Market

Rising Inflation and the Long Island Housing Market

Higher prices are almost everywhere in America—not just across Long Island. Inflation is rising, impacting everything from gasoline and health care to groceries and rent—including the cost of buying a home. Aggressive inflation without a counterbalanced growth in salaries and income—which is often the case today—means less money to spend on your mortgage every month.

The median household income on Long Island, adjusted for inflation, sits at just under $91,000 after declining from a high of $96,500 in 2007. And the average Long Island home sells for 4.2 times the average income. Pinched wallets are growing more common among homeowners—but the road ahead could loosen the grip.

Still, Suffolk County remains a great place to live. From access to the LIRR, high-quality parks, and top-rated public schools to local amenities and job opportunities, Suffolk is where buyers from all walks of life will discover the best of Long Island.

Something for everyone.

Whether you dream of the family-friendly atmosphere throughout the picturesque tree-lined streets of Smithtown, the scores of upscale yachts and small fishing boats lining the bustling harbor of Greenport, or the popular schools and universities home to Stony Brook, Suffolk County is the place to live on your own terms.

Whether you want to spend upwards of $2 million for an Amagansett home, downwards of $350,000 for a Lake Ronkonkoma home, or somewhere in between, expect a ton of variety across Suffolk County. If your budget is somewhere in the mid-$400K range, expect no shortage of options in Stony Brook, Wantagh, Commack, Manorville, and more.

However, the downside to moving to Suffolk County has been not just the astronomical price growth behind the low inventory and high demand of the post-pandemic housing market but also the rising inflation behind the surging Consumer Price Index.

The highest Consumer Price Index in decades.

The Consumer Price Index surged 6.2% year-over-year in October 2021, marking the biggest increase since December 1990. Core inflation—stripping out food and energy—increased 4.6%, marking the fastest gain since August 1991. The biggest gains happened to energy, shelter, and vehicle costs, which together more than wiped out worker wage increases for the month.

The housing market begins to cool down.

Real estate is long considered a hedge against inflation. Home values tend to keep pace with inflation, giving homeowners the benefit of fixed monthly mortgage payments. Rising home prices—which increased 19.8% year-over-year in August 2021—decrease buying power. However, there are already signs that price growth—despite remaining very high—could be cooling down a bit.

Home prices in Nassau and Suffolk fell for the second straight month in October. However, homes still sold for more than 10% above prices from the year before. In Suffolk County, the median price for a home dropped $5,000. However, the Long Island housing market is still on pace to break records for closed and pending sales in 2021.

Still, the supply and demand imbalance—with demand from buyers and investors holding strong and supply remaining extremely lean—will continue to impact home prices.

The median home price in Suffolk County hit a record-high of $535,000 in August 2021—a 17.6% year-over-year increase. Among other factors, low inventory contributed to the price boost. Today’s pace of market means it would take two months to sell a home in Suffolk County, which is far quicker than what real estate experts consider a balanced market.

All-time modern-day low inventory.

In December, the number of Long Island homes listed for sale fell to an all-time modern-day low. The 5,764 Long Island homes listed for sale marks the fewest number of available homes in decades and more than 4% less than the previous modern-day low of 6,008 recorded in March 2021. In Suffolk County, there are now just 2,996 homes listed for sale, dropping 9.5% in just the last month.

When compared with a decade ago, the current number of Long Island homes listed for sale is 73.3% fewer than the 21,500 homes listed in Nassau and Suffolk at the end of November 2011. The low inventory is a double-edged sword: one of the main factors keeping homeowners from selling is the fear of not being able to find another place to live.

Rising interest rates—but still an active market.

Mortgage interest rates—which often trend alongside inflation—are also on the rise. Monthly mortgage payments are $160 higher than last year and still climbing. However, despite the increase in costs, the real estate market remains active with a growing number of homeowners still listing their homes for sale.

65% of homeowners planning to sell their homes intend to do so in the next six months. About half (46%) plan to sell in the next three months. New home sales should boost existing home inventory with an uptick in new listings that should help to keep price growth in check.

However, strong demand continues to keep inventory moving quickly, especially for well-priced homes. Homes are still expensive but for most people, the more important dollar figure than the final selling price is the cost to own versus the cost to rent.

Renting vs. owning.

The average rent on Long Island accounts for 23.2% of household incomes. However, rent is less predictable than a fixed monthly mortgage payment—and likely to increase with inflation. Everything from rising wages to the cost of building materials, appliances, light bulbs, and paint flows into the cost of maintaining and building a rental home, which translates into higher rent.

Supply and demand also impact rent prices. Rent for a single-family home was up 10.2% nationwide year-over-year in September 2021. Between improved job growth and sky-high home prices, demand for single-family rentals has grown, fueled by the pandemic.

A staggering 93% of consumers believe owning a home is a good investment. However, fierce competition forces many potential buyers to remain renters. Single-family rental vacancy remained near 25-year lows in 2021, pushing annual rent growth to double digits. We expect more robust rent growth down the road, especially as the labor market improves and demand for larger homes continues.

All things considered, should you rent or buy? The answer depends on your unique situation and timeline.

The three years or more rule.

Home ownership is long considered a good investment. However, home values sometimes decline. Rather than monitor the market, focus instead on your budget and timeframe.

If you plan to stay for at least three years, homeownership makes sense, especially with favorable mortgage interest rates. However, you can still expect to battle stiff competition and bidding wars until housing inventory grows. And you can expect an easier time buying a home by next spring.

Changing attitudes and demographics.

A recent survey confirms 26% of homeowners plan to sell their home in the next 12 months—more than double the amount surveyed in March 2021. We see the market beginning to settle into a more typical, pre-pandemic seasonal pattern with new attitudes and different decisions about entering the housing market.

The younger generations are the most eager to sell including Gen Z (34%) and Millennials (49%). We see smaller numbers among Gen X (26%), Baby Boomers (11%), and the Silent Generation (8%). More of the younger generations also sold a home in the last 6 months.

The road ahead.

The past year challenged buyers with record-low housing inventory, skyrocketing home prices, and frenzied bidding wars. However, the third quarter of 2021 likely marked the peak for the housing market’s price surge. The housing market cooldown has started but still needs time to normalize. And we can expect less competition, more housing inventory, and more approachable prices in 2022.

Year-over-year home inflation should also begin to lower with double-digit growth lasting until the middle of 2022. And we expect a return to a pre-pandemic 5% pace in 2023.

Monthly price growth has eased slightly but remains at the highest year-over-year pace in more than four decades. As more Americans buy at breakneck speed and builders struggle to keep up, home price growth should continue throughout 2022.

Labor shortages and the supply crisis are keeping construction behind. Material bottlenecks and lumber price surges are cutting into builder profit margins. A shortage of workers means fewer housing starts, forcing buyers to bid on a small supply for the next several months.

Forecasting the numbers.

Fannie Mae forecasts the average 30-year fixed mortgage rate to climb slightly to 3.5% by the end of 2023. Food for thought: 3.7% was the average before the pandemic and the rate neared 5% in late 2018. Lower borrowing costs give buyers some relief against higher home prices.

No one forecasts home prices to decline. However, price growth should slow heading into 2023. Year-over-year home inflation should also drop to 4.4% in the second quarter of 2023 and 2.9% by the end of the year—roughly half the pre-pandemic norm and much-needed relief for buyers who can afford to wait.

However, the pandemic sparked a permanent rise in home prices. The median price of a previously owned home will surpass $400,000 by mid-2023 and reach a record-high of $464,000 by the end of 2023—roughly $100,000 higher than the start of 2021.

The bottom line.

If Fannie Mae is correct, we expect a mixed experience for homebuyers. On the plus side, buyers should have an easier time finding a home in the next two years. On the downside, affording your next home could become slightly harder.

Buy or sell a Suffolk County home with Team Rita on your side.

Ready to buy or sell a Suffolk County home? Contact us today to search our database of local inventory, schedule an open house, or explore our featured properties for sale.

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