A Sustained Housing Surge
The housing market is proving to be a bright spot in the economy—at least for now. Housing sales are strong, inventory is limited, prices are stable, and mortgage rates remain low.
Somehow, while businesses large and small have perished in this COVID-19 crazy world, the home sales and construction industries have managed to survive. But how much longer before they also have to pay the piper?
According to numerous experts, not for a while: three months, six months, even a year from now, depending on who you talk to. Most economists had originally projected that the coronavirus would result in a “short but sharp” event, with a steep tumble during summer and recovery starting in fall. But that projection went out the window with the massive wave of new infections to hit the nation (and the world) starting in late October 2020.
Questions now abound—rather than a “V,” “W,” or “swoosh” recovery, it’s likely that there will be waves of recovery, with ebbs and flows, until a reliable and safe vaccine is fully distributed.
Not to worry, according to Marco Santarelli, CEO of Norada Real Estate Investments in Laguna Niguel, Calif. COVID or no COVID, people continue to shop, inventory and interest rates remain low, and home prices continue to rise.
Median home prices nationwide have moved steadily upward in 2020, reaching the second-highest level seen since 2018.
“This trend shows that the housing market is as strong as it was during the housing bubble,” Santarelli says. “We typically see a decline in demand and a big increase in time on the market before the end of November. If this trend remains steady in the weeks ahead, that points to a seasonal slowdown, but if the time on market shrinks by a greater amount, that’s a signal that 2020’s housing market is going to remain hot even during holidays.” And continue into 2021.
Economic Strength In Hard Times
Research conducted by Green Builder Media backs up Santarelli’s assertion. According to COGNITION Smart Data, the housing market will continue unprecedented growth even in these uncertain times.
Housing starts—here showing only part of 2020—are on their way to the busiest year since 2006. There could be even more active times ahead for the construction industry in 2021. sert text here
As reported by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD), the growth in single-family starts throughout the summer continued through the end of last year: An estimated 1.39 million housing units were started in 2020. This is 7 percent above the 2019 figure of 1.29 million.
The biggest driver for all of this good news has been record low-interest rates, which hovered around 2.65 percent in January, according to Freddie Mac’s Economic & Housing Research Group (EHRG). The low interest rate environment is projected to continue through 2021 and 2022 as the Federal Reserve has voted to keep the interest rates anchored near zero until the economy rebounds.
Home mortgage interest rates, a key factor in the housing market’s strength, have hit an all-time low and are expected to stay there in 2021 and perhaps into 2022. Source: Freddie Mac Economic Housing and Research Group
As a result, homeowners are more comfortable selling their homes now than at any other time since early 2018, according to Zillow economist Matthew Speakman. In Fannie Mae’s Home Purchase Sentiment Index for January 2021, 57 percent of respondents said they believe now is a good time to sell a home and 52 percent say it is a good time to buy a home.
“Strong demand from home buyers is driving remarkable growth in home sales and prices, despite an ongoing and historic inventory shortage,” Speakman notes. “Improved seller sentiment is an encouraging sign that more sellers may soon emerge to help relieve the inventory crunch.”
Foreclosure-Related Problems On the Horizon?
With the advent of COVID-19, many consumers lost jobs and, in many cases, only avoided losing their homes to foreclosure due to temporary forbearance programs. More than 6 million households fell behind in payments in September, according to the Mortgage Bankers Association’s Research Institute for Housing America, and 1.2 percent of all loans were at least 150 days past due, according to Irvine, California-based marketing firm CoreLogic. Yet, overall foreclosures thus far are down 80 percent from 2019, Santarelli notes.
“At the moment, the moratoriums on foreclosure have kept lenders from being able to even start their processing of defaults,” he says. “The major effect [on the market] will be seen in the summer of 2021 because foreclosure that starts today is probably not going to be processed until mid-2021.”
All of those foreclosures will cause the housing supply to overwhelm demand by next summer. “The result,” Santarelli predicts, “would be that prices are going to plummet again and the real estate sector will likely cool off.”
Buying Beats Renting: By the Numbers
High rents, coupled with long-term isolation and working from home, have made homeownership more attractive than ever.
Renting a home isn’t what it used to be. Long seen as the option for people who can’t afford to buy their residence, it has, in recent years, become a springboard for homeownership.
With the arrival of the coronavirus—and the resulting fallout—buying a house seems like the only sensible choice. According to a report in Mansion Global, the coronavirus pandemic has many Americans rethinking the kind of lifestyle they want. “Apartment living in central, densely populated urban areas,” MG notes, “is losing its appeal as residents are subject to building restrictions and risk coming into contact with people infected by the virus.”
A Harris Poll from this past summer indicates that nearly one-third of Americans are considering moving to less densely populated areas in the wake of the pandemic. That has resulted in a residential shift that has helped push up real estate sales and home prices.
Suburban life has also gained popularity due to the need for people to work from home during the pandemic. “The rapid uptick in telecommunications and remote working has made it possible for people to move away from congested urban markets to lower-priced, less dense areas,” notes COGNITION Smart Data. “Homeowners can get more bang for their buck while still maintaining their jobs.”
There’s a financial element, too. The median 30-year home mortgage payment for a three-bedroom, two-bath home is $1,556 per month, according to the U.S. Census Bureau. By comparison, the median monthly rental cost is $1,657.
And in investment terms, each house payment offers a future return. Money for rent is gone with every monthly check.
On a national scale, the median monthly cost for a rental is $1,657, and the median monthly home mortgage is $1,556, which means that, on average, it costs about $101 less to own a home than to rent.
Credit: COGNITION Smart Data
Confidence Roller Coaster: Spend or Hunker Down?
Just as the economic freefall caused by the early pandemic began to stabilize, new fears shook up the market. Is another slide just around the corner?
Consumers may have positive feelings about home buying, but their feelings about the economy—which has a major impact on how many homes are built and sold—aren’t so rosy. The University of Michigan (UM)’s broader headline consumer sentiment index in November posted its first monthly decline since July. According to UM officials, the setback was driven by “growing pessimism about the future, rather than unease about the present.”
The report also highlighted the differences in sentiment across political party lines. Survey respondents who identify as Republican expressed far less optimism for the next six months than they did in October, while the outlook for those who identify as a Democrat did not change.
The pandemic is also to blame for consumer ennui. According to Kaye Hermanson, a psychologist at the University of California-Davis, the term “COVID fatigue” sums it up.
“Many people are exhausted by it all,” she says. “They’d rather risk getting sick than stay home or be careful. Others have simply stopped listening to health leaders and science.”
Here are ways that COVID-19 has impacted consumer behavior, as noted by COGNITION Smart Data:
- Consumer Confidence. Despite efforts to reopen the economy, net consumer optimism remains low. Most consumers expect that COVID-19 will impact the economy, their finances, and their lives for a long time to come.
- Spending. As incomes have declined, unemployment persists, and uncertainty remains. Consumers have reduced discretionary spending, focusing on essentials only. Groceries, household supplies, and home entertainment are among the necessities. Items such as restaurants, apparel, home furnishings, outside entertainment, personal care, travel, and recreation; not so much.
- Enhanced Digitization. Whether feeling fatigued or frightened, many consumers are keeping an online presence. Those with the means are shopping online. When given the choice, people continue to work and school from home through videoconferencing, video chat, and remote learning. Consumers are also far more reliant on telemedicine, home healthcare, and home fitness