Is the Real
Estate Market Going to Crash?
While many
areas of the economy have contracted, the housing market has stayed remarkably
strong. But can the good news last?
When COVID-related shutdowns began in March,
real estate brokers and clients scrambled to respond to the shift. Record-low
interest rates caused some lenders to call a halt to new underwriting, and
homeowners debated whether or not to put their houses on the market. However,
those first days of uncertainty ushered in a period of unprecedented demand in
the U.S. real estate market, which ended the year with increasing average home
prices (up 13.4% from the previous year) and shrinking days on market (13 fewer
than in 2019).1
Now, as the spring market approaches, you may
be wondering whether the good times can continue to roll on. If you’re a
homeowner, should you take advantage of this opportunity? If you’re a buyer,
should you jump in and risk paying too much? Below we answer some of your most
pressing questions.
How is
today’s market different from the one that caused the 2008 meltdown?
At the beginning of the pandemic, fears of an
economic recession and an ensuing mortgage meltdown were top of mind for
homeowners all across the country. For many buyers and sellers, the two seemed
to go hand in hand, just as they did in the 2008 economic crisis.
In reality, however, the conditions that led
to 2008’s recession were very different from those that triggered the current
downturn—and this time, the housing market is the source of much of the good
news.2 This is in line with historical patterns, as housing prices
traditionally hold steady in the face of recession, with homeowners staying put
and investors putting their money into bricks and mortar to ride out
uncertainty in the stock market.
This time around, because of lessons learned in
2008, banks are better funded, homeowners are holding more accrued equity, and,
crucially, much of the economic activity is focused on financial factors
outside the housing market. As many industries quickly pivoted to
work-from-home, early fears of widespread job loss-related foreclosures have
failed to materialize. Federal stimulus payments and the Paycheck Protection
Program also helped to offset some of the worst early effects of the shutdown.
Are we
facing a real estate bubble?
A real estate bubble can occur when there is a
rapid and unjustified increase in housing prices, often triggered by
speculation from investors. Because the bubble is (in a sense) filled with “hot
air,” it pops—and a swift drop in value occurs. This leads to reduced equity or,
in some cases, negative equity conditions.
By contrast, the current rise in home prices
is based on the predictable results of historically low interest rates and
widespread low inventory. Basically, the principle of supply and demand is
working just as it’s supposed to do. In addition, experts predict a strong
seller’s market throughout 2021 along with increases in new construction.3
This should allow supply to gradually rise and fulfill demand, slowing the rate
of inflation for home values and offering a gentle correction where needed.
Effects of low interest rates
According to Freddie Mac, rates are projected
to continue at their current low levels throughout 2021.4 This
contributes to home affordability even in markets where homes might otherwise
be considered overpriced. These low interest rates should keep the market
lively and moving forward for the foreseeable future.
Effects of low inventory
Continuing low inventory is another reason for higher-than-average home prices in many markets.5 This should gradually ease as an aggressive vaccination rollout and continuing buyer demand drive more homeowners to move forward with long-delayed sales plans and as new home construction increases to meet demand.6
Aren’t
some markets and sectors looking particularly weak?
One of the big stories of 2020 was a mass
exodus from attached home communities and high-priced urban areas as both young
professionals and families fled to the larger square footage and wide-open
spaces of suburban and rural markets. This trend was reinforced by
work-from-home policies that became permanent at some of the country’s biggest
companies.
Speculation then turned to the death of cities
and the end of the condo market. However, it appears that rumors of the demise
of these two residential sectors have been greatly exaggerated.
With the first vaccine rollouts, renters have
begun returning to major urban centers, attracted by the sudden rise in
available inventory and newly discounted rental rates.7 In addition,
buyers who were previously laser-focused on a single-family home responded to
tight inventory by taking a second look at condos.8 While nationwide
condo prices continue to lag behind those of detached homes, they’ve still seen
significant price increases and days on market reductions year over year.
In addition to these improvements, the 2020
migration has spread the economic wealth to distant suburban and rural enclaves
that normally don’t benefit from increases in home values or an influx of new
investment. As many of these new residents set up housekeeping in their rural
retreats, they’ll revitalize the economies of their adopted communities for
years to come.
How has
COVID affected the “seasonal” real estate market?
Frequently, the real estate market is seen as
a seasonal phenomenon. However, the widespread shutdowns in March 2020, coming
right at the beginning of the market’s growth cycle in many areas, has led to a
protracted, seemingly endless “hot spring market.”
While Fannie Mae’s chief economist Douglas
Duncan predicts slower growth from 2020’s historic numbers, the outlook overall
is positive as we embark on the 2021 spring selling cycle.9 Duncan
anticipates an additional lift in the second half of 2021 as buyers return to
business as usual and look to put some of their pandemic savings to work for a
down payment. Thus we could be looking at another longer-than-usual, white-hot
real estate market.
How
will a Biden administration affect the real estate market?
Projected policy around housing promises to be
a boost to the real estate market in many cases.10 While some real
estate investors bemoan proposed changes to 1031 Exchanges, the Biden plan for
a $15,000 first-time homebuyer tax credit aims to increase affordability and
bring eager new home buyers into the market. In addition, Biden-proposed policy
pinpoints low inventory as a primary driver of unsustainable home values and is
geared toward more affordability through investments in construction and
refurbishment.
Overall, according to most indicators, the
real estate news looks overwhelmingly positive throughout the rest of 2021 and
possibly beyond. Pent-up demand and consumer-driven policies, along with a
continued low-interest-rate environment and rising inventory, should help
homeowners hold on to their increased equity without throwing the market out of
balance. In addition, the increase in long-term work-from-home policies
promises to give a boost to a wide variety of markets, both now and in the
years to come.
STILL
HAVE QUESTIONS? WE HAVE ANSWERS
While economic indicators and trends are
national, real estate is local. We’re here to answer your questions and help
you understand what’s happening in your neighborhood. Reach out to learn how
these larger movements affect our local market and your home’s value.
Sources:
1. Realtor.com -
https://www.realtor.com/research/december-2020-data/
2. New York Magazine -
https://nymag.com/intelligencer/2020/06/why-this-economic-crisis-wont-be-as-bad-as-2008.html
3. Washington Post -
https://www.washingtonpost.com/business/2021/01/11/2021-housing-market-predictions/
4. Freddie Mac -
http://www.freddiemac.com/research/forecast/20210114_quarterly_economic_forecast.page?
5. Wall Street Journal -
https://www.wsj.com/articles/housing-market-stays-tight-as-homeowners-stay-put-11611226802?mod=re_lead_pos1
8. Washington Post -
https://www.washingtonpost.com/business/2021/01/07/condo-sales-rebound-amid-dwindling-inventory-houses/
9. Mortgage Professional America
-
https://www.mpamag.com/news/fannie-mae-chief-economists-forecast-for-us-economy-housing-market-in-2021-244045.aspx
10. Inman -
https://www.inman.com/2020/11/09/what-a-joe-biden-presidency-means-for-real-estate-and-housing/
