Housing Market Update
The real estate market soared last year even with a bump in the road when COVID-19 became a reality. Currently, demand is primarily being fueled by historically low interest rates along with the fact that many now work from home and need more space. So, as we approach the spring selling season, I thought I would share a market overview.
Interest rates – As I mentioned, one of the biggest drivers of demand is the extraordinarily low interest rates. Currently, with good credit, a 30-year fixed mortgage can be had for under 3%! We may see some dramatic swings in rates during the year, but The National Association of Realtors expects mortgage rates to average 3.1 percent in 2021, up from 3 percent in 2020. The Mortgage Bankers Association says rates will average 3.3 percent in 2021.
Sales – Sales continue to be very robust. California sales for 2020 were up 3.5% compared to 2019, which is quite remarkable when you consider the initial pull back due to COVID and the resulting disruption in our economy and housing market. Nationally, home sales are expected to rise about 10% in 2021.
Inventory/Demand – Unfortunately, inventory of available homes is also at historic lows. In fact, across the entire USA, there were less than 400,000 single-family homes for sale at the beginning of 2021. Compare that to just five years ago when there were nearly 1,000,000 for sale – a 60% decrease!
In addition to the simple fact that we are not building enough homes to meet demand, housing inventory continues to dwindle due to the following:
Many move up buyers are holding on to their current homes for rental income due to the affordability from low interest rates. In fact, rental homes have increased by 7 million units over the last 10 years, now totaling 18 million units
Further demand is coming from millennials who are now entering the market in a big way, and that will be a huge factor for the next 5 to 10 years.
Working remotely has gained an unprecedented prominence in response to stay-at-home orders and other measures to quell the spread of the coronavirus. Many have learned that they can work from home just as efficiently and therefore, we expect this trend to continue.
Risks & Challenges - Is the bubble about to burst? - No, I don’t believe so. We will see some foreclosures and additional homes come to market because of the pandemic, but not anything like we saw in the great housing collapse of 2008. And some additional inventory would bring a little balance to the market and help buyers.
Currently, there are approximately 2.5 million homes in forbearance, down from a high of 6 million. Most homeowners today have made significant down payments, have a fixed rate mortgage, and are gaining additional equity in their homes while in forbearance. Should those in forbearance find themselves unable to resume mortgage payments, most will elect to sell conventionally and walk away with some cash in their pocket.
As home prices continue to escalate, affordability will become an even bigger challenge. Many first-time buyers have the where with all to make the monthly mortgage payment but coming up with the down payment is problematic. President Biden has proposed a $15,000 first time home buyer tax credit which, if passed, would be available at the closing table.
The supply problem will not see dramatic improvement until the supply of new homes grows in significant numbers. Meanwhile, we are hopeful that as COVID concerns ease, sellers may feel safe enough to put their home on the market. Secondly, for California homeowners, Prop 19 goes into effect on April 1st and should help free up some inventory.
To summarize, I believe the market is strong and the fervent demand is evidence that many Americans are optimistic about our economic future. However, buyers must be well-prepared, patient, persistent, and flexible to be successful.