2021-03-02
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. Record-low interest rates caused some lenders to call a halt to new underwriting, and homeowners debated whether 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? I’m going to 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 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, the conditions that led to 2008’s recession were very different from our current economic situation—and this time, the housing market is the source of much of the good news.2 This is normal, as housing prices traditionally hold steady in the face of recession, with homeowners staying put and investors putting their money into real estate to ride out the uncertainty in the stock market.

This time around, because of lessons learned in 2008, banks are better funded, homeowners have more equity, and, crucially, much of the economic activity is focused on 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 there’s a swift in value. Prices plummet and this leads to reduced equity or, in some cases, negative equity where people owe more than a house is worth.

But our current market is very different. The current rise in home prices is based on the predictable results of historically low interest rates and low numbers of homes for sale. Basically, the principle of supply and demand is working just as it’s supposed to do. Here’s the good news: experts predict a strong seller’s market throughout 2021 along with more new homes being built.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, interest 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

Low inventory is another reason for higher-than-average home prices in many areas.5 This should gradually ease as COVID vaccinations roll out and buyer demand drives more homeowners to move forward with long-delayed plans to sell their homes 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 areas. This trend was reinforced by work-from-home policies that became permanent at some of the country’s biggest companies.

Some even thought cities would end up ghost towns and no one would buy in high-density condo communities. These rumors have not come to life.

With the first vaccine rollouts, renters are more confident and 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 took 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 economic wealth to distant suburban and rural areas that normally don’t benefit from increases in home values or an influx of new investment. As an example, here in El Paso county, manufactured homes on five acres that sold for $230,000 five years ago are now selling for as much as $400,000. As many of these new residents set up housekeeping in their rural retreats, they’ll revitalize the economies of their new communities for years to come.

 

How has COVID affected the “seasonal” real estate market?

The real estate market is often seen as seasonal, with folks putting their homes on the market in the Spring and Summer so buyers can make a move before school starts in the fall. However, after the widespread shutdowns in March 2020, demand has been so consistently high that we’re in a seemingly endless “hot spring market.”

While Fannie Mae’s chief economist Douglas Duncan predicts slower growth compared to 2020’s numbers, the outlook overall is positive for 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 as a down payment. Basically, we could be looking at a longer-than-usual, white-hot real estate market.


How will a Biden administration affect the real estate market?

Projected government policy around housing promises to be a boost to the real estate market in many cases.10 While some real estate investors worry over proposed changes to 1031 Exchanges, which are used to avoid capital gains taxes, 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 the reason behind increasing home prices and promises more construction and the refurbishment of affordable housing units through the establishment of a $100 billion Affordable Housing Fund.

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.

 

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 -
    https://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
  6. Marketwatch -
    https://www.marketwatch.com/story/new-home-construction-activity-soars-to-highest-level-in-over-a-decade-as-builders-rush-to-produce-single-family-homes-2021-01-21
  7. Forbes -
    https://www.forbes.com/sites/noahkirsch/2021/01/14/signs-of-a-rebound-new-york-city-rent-prices-are-climbing-back
  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/
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