Recessions Do Not Equal Plunging Home Prices

Americans looking for fire sales and below-market deals today are finding themselves increasingly disappointed at the resilience of home prices in 2020 thus far. In fact, many homebuyers and their Realtors are reporting multiple offers on great homes in the best neighborhoods across the country.

How can this be? The United States is currently sitting at the highest unemployment rate since the Great Depression, yet home buyer demand remains strong and prices continue to appreciate in most areas. What gives?

Many prospective homebuyers are asking the same question, and the answer is simple; it boils down to supply and demand.

Homeowners Are Not Selling

While it is true that demand for housing has slowed amid the coronavirus pandemic, the supply of new homes being listed for sale has also seen a decrease. It’s easy to understand why – if you were a home owner, would you want strangers walking through your home and potentially contaminating it with COVID-19?

Most sellers are not in a hurry to sell in this environment, so we’ve seen home inventory slowly moving lower and lower.

“We note that inventory as a percent of households sits at the lowest level ever, something we believe will limit the overall degree of home price pressure through the year.”

– Ivy Zelman, CEO, Zelman & Associates

Prior to the Great Recession, subprime mortgage loans were the norm and qualifying for a home (and multiple investment properties) was easy to do. This resulted in a speculative buying spree from people who did not have the ability to pay their mortgage payments.

In contrast, today’s home owners are generally utilizing their homes as owner-occupied residences instead of investment properties. They also had to qualify for their mortgage loans under stricter credit, income, and down payment requirements.

We can see this tightening of lending standards represented in the Mortgage Credit Availability Index. The higher the index, the easier it is to obtain a mortgage loan. The index hit an all-time high in 2007, and in the twelve years since the credit bubble deflated in 2008 it has been fairly onerous for mortgage applicants to obtain credit approval.

“House prices aren’t overvalued like they were in the last crisis, because you don’t have the speculation, and you don’t have millions of adjustable-rate subprime loans.”

- Mark Zandi, Chief Economist, Moody’s

As a result of the more stringent mortgage underwriting guidelines, distressed property sales (properties that are under foreclosure or being sold by a lender) have plummeted to near record lows.

Homebuyers who have obtained their homes since the Great Recession are in no hurry to sell, and those who are have very little reason to list their homes at subdued prices.

This is because today’s sellers are sitting on record amounts of home equity. According to CoreLogic, the average home owner with a mortgage has $177,000 of equity in their home (value of home above and beyond what they owe on their mortgage). Furthermore, 58.7% of homeowners have at least 60% equity in their homes.

These sellers are not overleveraged or in a hurry to sell. This is the primary reason we continue to see more demand than supply of homes on market and strongly caution that there will be higher prices in the future.

“Two forces prevent a collapse in house prices. First, as we indicated in our earlier research report, U.S. housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand.”

- Freddie Mac

Housing Is More Affordable Than Ever

Although prospective homebuyers today are unlikely to find deeply discounted homes for sale, they are able to qualify for lower mortgage interest rates than ever before. Over the last forty years, interest rates have plummeted from an all-time high of above 17% to a low of near 3% today

Many of these buyers were priced out of the market in 2005 and 2006 when home prices appreciated at record levels. The resulting housing crash meant they were forced to continue to sit idly by and wait out the storm.

That sentiment seems to be changing now as rents have continued to skyrocket and interest rates have hit an all-time low. According to Freddie Mac, mortgage interest rates will remain historically low throughout 2021. This will keep housing payments low and drive even more demand from those who are currently renting.

We are already starting to see this happen. According to the U.S. Census Bureau, homeownership rates have reversed their trend and are now heading higher for the first time since 2005.

Conclusion

If you are considering buying a home, do not wait any longer. Home values are going to continue to increase as will demand and competition.

Send me a message or visit https://fairwayut.com/ to request a free Total Cost Analysis. This detailed report will help you determine which mortgage option fits your needs with the lowest overall cost. It will also show you strategies to increase your equity and wealth in real estate by choosing the best mortgage strategy for your specific situation.