Worried that this white-hot real estate market can't continue?

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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 last 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 fewer 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’ll answer some of your most pressing questions below.

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 ensuing mortgage meltdown were top of mind for homeowners everywhere. After all, the two went hand in hand 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: housing prices traditionally hold steady in the face of recession because homeowners stay put and investors put their money into real estate 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 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 housing prices occurs. Homeowner equity drops or disappears completely.

By contrast, the current rise in home prices is based on the predictable results of historically low interest rates and widespread low inventory, meaning supply and demand are working just as they’re supposed to. In addition, experts predict a strong seller’s market throughout 2021 and increases in new construction.3   This should allow supply to gradually rise and help fill demand, slowing the rate of price appreciation.

Effects of low interest rates

Freddie Mac projects that rates will continue at their current low levels throughout 2021.?   These low rates help offset sometimes dramatic price increases, keeping housing affordable and the market lively and moving forward for the foreseeable future.

Effects of low inventory

Ongoing low inventory is another reason for higher-than-average home prices in many markets.?   This should gradually ease as the pandemic subsides and more homeowners move forward with long-delayed sales plans. Increasing new home construction will also help meet demand.?

ARE ANY 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 the more wide-open spaces of suburban and rural markets. This trend was reinforced by work-from-home policies that may now be permanent at some of the country’s biggest companies.

Renters have begun returning to major urban centers, attracted by the sudden rise in available inventory and newly discounted rental rates.?   In addition, buyers who were previously laser-focused on single-family homes responded to tight inventory by taking a second look at condos,?  resulting in significant price increases and faster turn in condo developments.

This 2020 “migration” has spread economic wealth to distant suburban and rural enclaves that normally don’t benefit as much from increases in home values or investment. As many of these new residents set up housekeeping in their rural retreats, economies in those communities will continue to thrive.

HOW HAS COVID AFFECTED THE “SEASONAL” REAL ESTATE MARKET?

Typically, the local real estate market has a seasonal pattern. However, the widespread shutdowns in March 2020 have 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 very positive as we enter the 2021 spring selling cycle.?   Duncan anticipates an additional lift in the second half of 2021 as buyers who have resumed saving for a down payment return to the market. 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.1o   While some real estate investors bemoan proposed changes to 1031 Exchanges, other Biden-proposed policy is geared toward increasing availability 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 gradually rising inventory, should help homeowners hold onto their increased equity without throwing the market out of balance. In addition, the increase in long-term work-from-home policies promise to cause many home sellers to sell their current homes and look for homes that better suit their new lifestyles.

STILL HAVE QUESTIONS? LET ME HELP!

While economic indicators and trends are national, real estate is local. I’m 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:

Realtor.com - https://www.realtor.com/research/december-2020-data/

New York Magazine - https://nymag.com/intelligencer/2020/06/why-this-economic-crisis-wont-be-as-bad-as-2008.html

Washington Post - https://www.washingtonpost.com/business/2021/01/11/2021-housing-market-predictions/

Freddie Mac - https://www.freddiemac.com/research/forecast/20210114_quarterly_economic_forecast.page

Wall Street Journal - https://www.wsj.com/articles/housing-market-stays-tight-as-homeowners-stay-put-11611226802?mod=re_lead_pos1

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

Forbes - https://www.forbes.com/sites/noahkirsch/2021/01/14/signs-of-a-rebound-new-york-city-rent-prices-are-climbing-back

Washington Post - https://www.washingtonpost.com/business/2021/01/07/condo-sales-rebound-amid-dwindling-inventory-houses/

Mortgage Professional America - https://www.mpamag.com/news/fannie-mae-chief-economists-forecast-for-us-economy-housing-market-in-2021-244045.aspx

Inman - https://www.inman.com/2020/11/09/what-a-joe-biden-presidency-means-for-real-estate-and-housing/