In a mostly dreary 2020, one bright spot was the residential real estate market. After briefly retrenching at the beginning of the pandemic, home sales exploded, even as a dearth of homes on the market and low mortgage rates caused prices to skyrocket. Those rising prices lifted home values, creating more wealth for homeowners.
Now, despite the pandemic-induced recession, the price of a house in all the major markets continues to shoot up, and according to economists and market-watchers, the residential real estate sector has been highly supportive of the national economic recovery so far (Housing’s contribution to GDP generally averages 15-18%) and has been emerging as a pillar of the U.S. economy.
A Pause, Then a Steady Climb
Housing prices had already started rising before the COVID-19 virus hit, but the pandemic spurred a rapid double-digit acceleration. Since June 2020, the housing market has seen record-breaking growth after being briefly stalled during the virus’ outbreak in early spring 2020. It is one of the few sectors of the market that has held up thru the pandemic.
As prices continue to climb month-over-month, it shows the resilience of the U.S. housing market in the face of the ongoing recession. Despite looming economic uncertainty, homebuyers continue to quickly snatch up the relatively few houses listed for sale. The housing market had already been running short of previously owned homes. The pandemic knocked down builders’ ability to fill the housing supply; meanwhile, builders are running out of available land for new construction.
The shift in the geography of demand was a key dynamic for housing in 2020. Buyers wanted more space, and the increase in telecommuting has allowed buyers and renters to move farther from urban cores to attain more affordable housing.
The number of homes for sale has plummeted and remains down around 30% of what it has been in recent years—leaving the market with nearly twice the demand and two-thirds of the supply. Both the inventory of homes and mortgage rates are now at their historic lows.
During the fourth quarter of 2020, affordability worsened in much of the United States as median home prices rose at least 10% in most of the nation, according to a report by ATTOM Data Solutions, a California-based real estate and property information firm. The report found that 275 of 499 counties it analyzed were less affordable in the fourth quarter of 2020 than past averages. That number is up from 217 in the fourth quarter of 2019 and 164 in the fourth quarter of 2017.
Many experts are predicting another strong housing market in 2021, driven both by a shortage of available housing inventory and extremely low interest rates. The lack of inventory and high demand creates a seller’s real estate market.
Experts see the increased demand coming from first-time buyers who delayed purchasing homes because of the pandemic, existing homeowners who need larger spaces to accommodate working from home and children attending school virtually, and condo owners who are seeking to mitigate exposure to the virus by escaping high-occupancy buildings for single-family houses.
Prices Take Flight
During 2020, new-home sales were 811,000, 18.8% higher than in 2019, while existing-home sales were 5.64 million, 5.6% higher than in 2019. Housing inventory sank to 1.04 million and a 1.9-month supply in January 2021—both historic lows. Seventy percent of the homes sold in December 2020 had been on the market for less than a month.
National Association of Realtors chief economist Lawrence Yun predicts new-home sales will jump 21% and existing-home sales will climb 9% in 2021. He predicts home prices will rise by 3% in 2021. “The consequent rise in home prices have boosted wealth accumulation for homeowners,” Yun said. “But the opposite side of this will mean the continued decline of housing affordability and will limit future homeownership opportunities for young adults if housing supply is not greatly increased.” Yun also says mortgage rates will hover near record lows at around 3%.
Realtor.com, an official site of the National Association of Realtors, says it expects home prices could reach new highs in 2021, climbing by 5.7%, as growth continues but at a slower pace. The number of homes for sale will slowly rebound, offering buyers some relief. The number of homes for sale in the United States reached an all-time low in December, dipping below 700,000 for the first time ever, according to Realtor.com‘s Monthly Housing Trends Report.
Realtor.com also expects existing-home sales to rise 7% and single-family housing starts, which are new residential construction projects that are just getting underway, to grow by 9%. Mortgage rates will steadily move higher, reaching 3.4% by year’s end.
Edward J. Pinto, director of research at the American Enterprise Institute’s Housing Center, says “the supply of homes in 2021 will continue to be severely constrained.”
Pinto notes that “[this] imbalance has been fueled by the work-from-home phenomenon, the millennial generation becoming homebuyers … second-home demand due to the pandemic, and then, of course, low rates are leading to increased demand. We see that this will continue for some time. It is very difficult to replenish or add to supply. Existing homeowners in many cases are staying put, particularly the ones that are older.”
Because there is little housing inventory for sale, some markets experience a multiple-offer situation when a home comes on the market for sale. Because of this, the price of the home gets bid up. When this happens, the sale price can often rise to above what the home is appraised for. What does this mean? If there is a mortgage involved in the transaction, the bank will not give a mortgage for more than the appraised value. Unless the sale price is lowered to the appraisal price, then the difference needs to be made up with cash. In recent months, the amount of cash needed in some cases has been as much as 10% of the purchase price.
Raising the Roof
Residential construction was a bright spot for the economy in 2020. After an initial decline in builder confidence and construction activity in March and April, the outlook for building improved considerably.
Home builders reported ongoing strong levels of buyer traffic, yet cited supply-side concerns related to material costs and delivery times. Availability of land and lots was also reported as a challenge. For 2020, single-family starts were up almost 11% over the 2019 total. Remodeling was strong across all of 2020. The primary drivers of gains in 2020 were low interest rates and a renewed focus on the importance of housing during the pandemic.
For 2021, National Association of Home Builders expects ongoing growth for single-family construction. It will be the first year for which total single-family construction will exceed one million starts since the Great Recession, a 2.5% gain over the final 2020 total of 884,000. Starts will be higher than sales in percentage terms, because builders need to catch up with the sales undertaken in 2020.
Growth is expected because inventory of both new and existing homes remains low. Only a four-month supply of new homes remains available, while a five-to-six-month supply is considered balanced.
Conclusion
Home listing prices continue to grow at double-digit rates and are not expected to provide immediate relief to buyers as demand remains elevated and supply remains tight. Despite healthy growth in the number of newly constructed single-family homes, a more sustained increase in newly listed existing homes or a dramatic increase in mortgage rates would be required to alleviate this ongoing supply crunch.
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