Here is the Market Snapshot I sent out last month. I usually send out a snapshot of the housing market each spring, and I delayed this one a little, but we now have lots of data to see how the wind is blowing – bottom line, the situation looks pretty sound.
I didn’t bombard people with data points, but just gave the highlights of where we are and where we’re going. As always, if there’s anything you want to explore in more detail, give me a call.
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Housing Market in May, 2021
Summary
Economists expect the price gains to settle by the end of 2021, returning to the normal, single-digit gradual appreciation. We can expect more inventory to come up for sale as the pandemic eases and America opens up, as consumers finally spend money they’ve been holding back, and as the industry transitions, very carefully, out of loan forbearance and back into regular payment stability.
The housing market appears giddy, with huge price gains and bidding wars, but we’re actually seeing a superbly fit market mechanism operating precisely as supply and demand should operate. The housing market has been the one bright spot in the US economy for several years, and has come through the pandemic more robustly than anything.
The stories of the frantic activity around each property for sale should not obscure the massive tectonic shifts in American life playing out over the next decade. The fundamentals of ownership and renting, and multi-generational living in a country with an aging demographic, will continue to imprint the housing market for years to come, regardless of fluctuations between supply and demand.
Prices
NAR’s economist Lawrence Yun predicts a median price increase of 7% for 2021. That’s still a higher price gain than I would usually call normal, but remember that we’re being hit with inflation from all the printed money, and that will have to work its way through the economy.
Homes are selling over asking price – some stories report as much as 30% over. Buyers are afraid of missing out, even buying sight-unseen, and some sellers are going to market simply because it’s too good to miss.
Cash wins the bidding war, and inspection contingencies are being fast-tracked or discarded. Closings are happening in very short time periods – so fast that sellers often have to require a leaseback in order to accept an offer, to give them time to move. But if you don’t have somewhere to go, you’re not going to sell your home and become a buyer in this frenzy. The buying frenzy itself works to kill new inventory.
Case-Shiller tracks home prices, and when in doubt ask FRED, the Fed’s economic data source. The only link I’ll burden you with is to this graph of home prices since 1987. Notice the huge bubble that burst, as we know, in 2008 and plunged home values lower than the median curve. That was a time of too much inventory and too easy loans, so once again it was supply and demand that worked to lower prices until inventory stabilized.
Values roughly caught back up to gradual appreciation levels by 2014, as the graph shows, and continued in a stable, gradual gain from the pressure of fundamentals. 2020 is where prices spiked again, as inventory became close to non-existent.
That spike is now being forecast to settle down in this year. More sellers or less buyers will accomplish that. One in four homeowners plans to sell within the next three years. And millions of buyers have been forced away until the bidding wars settle down. Also, investors with cash are one of the principal reasons that owner-occupier wannabees can’t buy.
Inventory
Yun predicts in 2021 resale home inventory growing by 10% and new homes by 20% over today’s numbers. That’s useful of course but it’s hardly a bonanza. There’s nothing looming to push prices into negative movement. As forbearance expires, more homeowners may come to market, but foreclosures no longer appear threatening (see below).
There are millions of potential sellers and buyers who are not in the market today. As inventory grows and the frenzy dies down, a large amount of more stable activity is waiting to join the market. So the continual push to buy should continue – high rents alone will guarantee that pressure for ownership.
Investment
Renting is a business model now. Many people in America now realize what only investors used to know, that owning property for rent is a sound investment. One in five of current home sales involves an investor – 1 in 5 of all homes sold are being bought as a rental.
One large investment company is planning to build single-family new homes purely as rentals, but most investors are small – and many are new. We now see groups of individuals investing in REITs or forming a co-op to own a rental property.
And this is not just in the big cities. Investment pressure is happening in small towns across America, with lower taxes and home values. Rental is the model. Homeowners too are using their equity and savings to buy a second property – staying put in their home and buying another, often as a rental, but also with elderly family in mind.
Foreclosures
After a year of forbearance, by April of this year, almost 92% of mortgage holders were current with payments. Around 4 million mortgages are currently in forbearance, which will end for most this September. Some lenders are resuming foreclosures in July – there were 250,000 foreclosures already in progress before the pandemic that were frozen for 14 months – but big players like Chase report 90% of their borrowers have already left forbearance.
The Consumer Financial Protection Bureau has been concerned that we come out of forbearance in a careful transition. NAR has been part of the discussion. The goal is to reabsorb any delinquency into the economy without undue hardship, through a mix of foreclosures and short sales. Short sale by the way, doesn’t mean selling the property for less than market value, it simply means the lender closing the loan for less than agreed.
The rule of thumb in the lending industry is that a borrower with 10% equity gives the lender room to restructure a loan. From what we saw last year, most homeowners who took forbearance held over 10% equity. And we’ve seen significant equity gain in this time, which has helped lift some homeowners out of trouble.
Analysts in general are not concerned about potential foreclosures coming to market. Many think that there won’t be many homes added to inventory, and all agree that the current buying pressure will absorb them without impacting home values – and this is what I have thought all along.
Lifestyles
One in five homes in America is now multi-generational, which means two or more adult generations living together. Some of this is from grown children coming back home, and a very large part comes from adults moving their parents in to take care of them as they age.
The demographic shift to aging parents will continue for years to come. And nursing homes lost a lot of attraction in the pandemic. These are very strong and clearly seen fundamentals that will affect how we live.
Homeowners are remodeling their homes to stay put as they grow old, or to accommodate elderly family as they age. Family members are also selling two homes to move into one home together. The economic pressures of high rent and lowered income are only an added feature of this longer-term trend of different generations living together.
All this makes for some lively households – people generally report a good experience from all the family living together, something America hasn’t known for many decades, but which we are experiencing again.
