In case you haven’t noticed, the US housing market is hot and getting hotter. For many, this would seem to mean there is a bubble that’s sure to pop anytime now. Let’s take a closer look.
According to the National Association of Realtors, home sales rose 5.6% in 2020, to the highest pace seen since 2006. And, as reported in the Wall Street Journal on March 15, 2021, over 161 metro areas posted double-digit price increases in the fourth quarter, up from 115 metro areas in the third quarter. If you are buying or selling a home you already know what this means; bidding wars, sight-unseen offers and extremely compressed listing and sales times. All the signs of a bubble and imminent crash, right?
Maybe not. What is driving the market today is very different from the experience in 2006. Back then, loose credit and lending standards were the order of the day, and borrowers often were able to state their income and cobble together deals with minimal downpayments. Today, the average buyer has a much higher credit score and significant cash deals and downpayments. Lenders are also much stricter in their lending standards and underwriting.
It’s also true that interest rates are lower now, and that is certainly a driver today. Another big factor is inventory. Demand has outstripped supply by a large margin, first because many homeowners are giving serious thought to the lifestyle they want to live post-pandemic. Many have discovered they don’t need to commute every day, or at all. The demand for single family housing in the suburbs has skyrocketed as a result.
A second factor is demographic. The largest cohort by far in the US today is 24 to 35-year olds. This is the sweet spot of household formation. And for many of these first-time homebuyers, that first home purchase has been delayed given the slow recovery from the great financial crisis and the sudden disruption of the Coronavirus shutdowns. As the pandemic subsides, more households should come together with the associated need for housing. And both new and existing homes are in short supply to meet this demand.
Of course, it’s not all good news. While higher prices are great for sellers, buyers face tough choices when it comes to budgeting for a home purchase. Many are actually choosing to rent for the time being, despite rents following along in the ever-higher trend. Also, a sudden reset with respect to interest rates could cool the market, but would also mean higher mortgage payments overall. That said, the Federal Reserve has maintained its stance on low rates for the foreseeable future. If the economy continues to make progress coming out of the pandemic and homebuilders start to catch up on the inventory lag, home prices could moderate. In any event, it is unlikely we would see anything like the housing crash experienced in 2008-2009.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.