Housing Market Crash or Boom in 2021?

17 Feb 2021 11:32 AM | Anonymous

Real Estate Markets

We have collected some data from credible sources that show how the US housing market is recovering week after week from the blows of the pandemic. 

Housing Market Crash or Boom in 2021?

The US housing market is far from crashing in 2021 or 2022. In fact, it continues to play an important supportive role in the country’s economic recovery. Current economic conditions resemble a “swoosh” pattern, with the initial impact from the lockdown followed by a gradual recovery as the economy reopens.

Mortgage rates and slow but steady improvements to the job landscape continue to propel confidence for first-time buyers. The pace of existing-home sales has jumped to a level not seen since 2006 and, importantly, was followed by strong pending sales, purchase mortgage applications, and construction data.

The U.S. economy is expected to grow 5.3 percent in 2021, a substantial improvement from the currently projected 2.7 percent contraction in 2020, with a strong pick-up in growth projected to commence over the spring months, according to the latest commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group.

Housing activity is expected to remain strong in 2021, but the growth will likely decelerate from the torrid pace set in the second half of 2020. While the ESR Group expects home sales to rise 3.8 percent in 2021, the monthly pace is likely to slow through much of the year. Home price appreciation is also expected to slow along a similar timeline.

Historically, low-interest rates are also an inducement to buy homes, but slow supply growth continues to result in high levels of home price appreciation, which is offsetting some of the affordability benefits of the lower rate environment. Housing starts have surpassed expectations at the end of 2020 and remain poised to show continued strength in 2021.

The latest forecast of full-year 2021 real GDP growth is an upgrade of 0.8 percentage points from the previous month’s forecast, reflecting the ESR Group’s view that the expansion of COVID-19 vaccination efforts and the approach of warmer weather will likely reverse the economic weakness experienced at the end of 2020.

As Federal Reserve has made clear that it has no intention of raising interest rates soon, many households are seizing the opportunity to refinance their existing mortgages. Let's first see how various consumer surveys are responding in wake of this crisis.

The Fannie Mae Home Purchase Sentiment Index® (HPSI) is a good indicator of the houisng recovery and buyer and seller behavior. The index measures housing attitudes, intentions, and perceptions, using six questions from the National Housing Survey® (NHS). The HPSI fell for the second straight month in December to 74.0, a 6.0 point decline from November.

Five of the six HPSI components decreased month over month, and consumers reported a substantially more pessimistic view of homebuying and home-selling conditions, which drove the relatively large monthly change. Year over year, the HPSI is down 17.7 points. It fell 1.7 points in November to 80.0, the first decline after three consecutive months of increases since late spring.

The sell-side component fell for the first time since April and by 18 points which shows a more pessimistic view of home-selling conditions and home prices, including mortgage rate expectations. If sellers choose to wait to list their homes, this could have the effect of perpetuating already-tight inventory levels and supporting additional home price growth, which could contribute to a further moderating of home sales and decreasing housing affordability.

The latest survey finds out the percentage of respondents who think it’s a ‘good/bad time to sell a home’ vs those who think it's a ‘good/bad time to buy a home’. 

  • Good/Bad Time to Buy: The percentage of respondents who say it is a good time to buy a home decreased from 57% to 52%, while the percentage who say it is a bad time to buy increased from 35% to 39%. As a result, the net share of Americans who say it is a good time to buy decreased 9 percentage points month over month.
  • Good/Bad Time to Sell: The percentage of respondents who say it is a good time to sell a home decreased from 59% to 50%, while the percentage who say it’s a bad time to sell increased from 33% to 42%. As a result, the net share of those who say it is a good time to sell decreased 18 percentage points month over month.
  • Home Price Expectations: The percentage of respondents who say home prices will go up in the next 12 months remained the same at 41%, while the percentage who say home prices will go down increased from 13% to 16%. The share who think home prices will stay the same decreased from 35% to 34%. As a result, the net share of Americans who say home prices will go up decreased 3 percentage points month over month.
  • Household Income: The percentage of respondents who say their household income is significantly higher than it was 12 months ago decreased from 24% to 20%, while the percentage who say their household income is significantly lower remained unchanged at 18%. The percentage who say their household income is about the same increased from 57% to 61%. As a result, the net share of those who say their household income is significantly higher than it was 12 months ago decreased 4 percentage points month over month.

The Federal Reserve Bank of New York's Center for Microeconomic Data released the December 2020 Survey of Consumer Expectations, which shows that median inflation expectations increased at the medium-term horizon, and remained unchanged at the short-term horizon. Uncertainty about future inflation increased slightly, remaining at an elevated level.

Median home price change expectations, which have been trending upward after reaching a series' low of 0% in April 2020, increased sharply from 3.0% in November to 3.6% in December, the highest reading since July 2018.

It also shows that mean unemployment expectation — or the mean probability that the U.S. unemployment rate will be higher one year from now — decreased from 40.1% in November to 38.9% in December, equal to its trailing 12-month average.

The mean perceived probability of losing one's job in the next 12 months increased slightly from 14.6% in November to 15.0% in December, remaining slightly below its December 2019 level of 15.4%. Median expected household income growth increased by 0.1 percentage point to 2.2% in December.

According to Zillow's market pulse report dated February 12, 2021, housing market sentiment improved in January, while overall economic optimism remained depressed. While demand for housing remains red hot, supply-side constraints that have hindered homebuilders for years have recently become even more acute. Mortgage rates are holding firm even as Treasury yields continue to rise and access to most mortgages became easier in January.

  • More existing homes were sold in 2020 than in any year since 2006
  • December existing-home sales rose 0.7% from November and 22.2% from December 2019 to 6.76 million (SAAR).
  • In total, 5.64 million homes were sold in 2020, up 5.6% from 2019.
  • Home value growth breaks new records.
  • The typical U.S. home was worth $266,104 in December, up 8.4% (or $20,587) from a year ago.
  • Home values grew 3.2% in the fourth quarter of 2020 – the fastest three-month pace of appreciation since at least 1996.
  • December housing starts cap an extraordinary year
  • December housing starts rose 5.8% from November and 5.2% from a year ago to 1.669 million (SAAR).
  • The 1.709 million (SAAR) permits filed in December were up 4.5% and 17.3%, respectively, from November and December 2019.
  • Home values in Austin grew 5.3% in the past quarter, while home values grew 5.1% over the same period in Phoenix, San Diego, and Salt Lake City.
  • For now, there are no indications that price growth is going to slow.
  • Zillow's latest forecast predicts annual home value growth will rise as high as 13.5% by mid-2021, and for home values to end 2021 up 10.5% from their current levels.

Realtor's Recovery Index: No Housing Market Crash Coming

According to Realtor.com's latest recovery report, the Housing Market Recovery Index reached 103.7 nationwide, up 0.3 points over the prior week.

  • The overall index remains above the pre-COVID baseline, with all measures growing faster than this time last year, except for new listings.
  • The ‘housing demand’ component increased 2.1 points to 116.9, growing but at a slower pace than in December.
  • The overall recovery index is showing the greatest recovery in Portland, Los Angeles, Denver,  Boston, and Las Vegas.
Week ending 1/23 Current Index w/w Change
Overall Housing Recovery Index 103.7 +0.3
Housing Demand Growth Index 116.9 +2.1
Listing Price Growth Index 110.8 -0.6
New Supply Growth Index 87.3 +0.8
The pace of Sales Index 108.6 +0.0

The graph below charts the index by showing how the real estate market started strong in early 2020, and then dropped dramatically at the beginning of March when the pandemic paused the economy. It also shows the strength of the recovery since the beginning of May. A W-shaped recovery can be seen.

Housing Market CrashCredits: Realtor.com (Housing Market Recovery Index)

The housing index is pegged to a starting point of 100 at a particular year. And then they can just track whether things are improving or declining from that reference point. It’s similar to any other index where you have a starting point or a starting year and you peg it at a hundred and it just goes up and down from there.

It went up for most of March, and then it hit this peak and came down rapidly and fast over the course of essentially the end of March, April, and right through to the beginning of May where it bottomed out. So after May 1st, that index started to go up, it passed 85 in mid-May and then continue to work its way up rather quickly.

The recovery index had reached 106.6 nationwide for the week ending July 18, bringing the index above the pre-COVID recovery benchmark for the first time since March, and then it kept going up from there till Dec 26.

After that, it fell sharply by 14.1 points and reached below the pre-COVID benchmark on Jan 2, 2021. It was the first major decline that we have seen since April 2020. The index has formed a V-shaped curve back again reached 103.7 points as of Jan 23. 

Are Housing Prices Increasing?

Last year, the inflow of buyers and sellers remained abnormally high. The ‘home price’ component fell slightly to 110.8 points this past week but remains well above the January 2020 baseline and remains higher than the 109.7 point average over the course of December. With inventory failing to see any visible improvement, asking prices continue to rise near-record levels even as short-term economic and COVID concerns fail to disappear. Sellers have newfound leverage, enabling the fastest listing price growth recorded in more than two years.

Although the fastest price growth has been recorded since January 2018 it is yet to be seen whether higher asking prices will translate into higher selling prices. A seller would always prefer sales to a list price ratio of 100% or more. If inventory continues to decline at the current sales pace, we’ll get a clear indication of this ratio.

Locally, 33 of the 50 largest houisng market markets seeing growth in asking prices surpass the January baseline, the same as the previous week. The most recovered markets for home prices include Austin, Pittsburgh, Riverside, Richmond, and Houston, with a home price growth index between 113 and 128.

Is The Housing Demand Growing?

The Housing Demand component – which tracks growth in online home searches nationwide – increased to 116.9 this past week, up 2.1 points over last week but still down compared to the 122.9 point average over the course of December. It shows that the pool of active buyers has continued to grow but at a visibly slower rate than observed in the fall. Buyers remain motivated but watchful of interest rates and frustrated by a shrinking inventory.

Locally, 45 of the 50 largest real estate markets are still positioned above the recovery trend, up by 3 from the previous week. The most recovered markets for home-buying interest include Austin, Miami, Houston, San Antonio, and Seattle; with a housing demand growth index between 137 and 153.

Is Housing Supply Increasing?

In the first week of August, the index had managed to reach the January baseline for the first time as more sellers re-entered the market but it was a temporary boost in new listings which weakened later in August. The housing supply index, which measures the growth of new listings, has been slow to recover in the first two weeks of the new year but continues to move slowly in the right direction.

Last week, the supply component rose slightly to 87.3, 0.8 points above the previous week but still down compared to the 107.6 point average over the course of December. Selling activity has remained volatile in the post-pandemic period, and this relatively slow start to the year by sellers confirms that they might wait to list more homes.

A sustained rebound in newly listed homes for sale remains elusive and highly localized but this week’s improvement is encouraging. The housing supply will need to carry consistent momentum forward to balance the relentless growth in demand.

Will sellers choose to go against the usual seasonal decline in new listings? What do you think? Locally, only 11 of the 50 largest housing markets saw the new listings index remain above the January baseline, two fewer than the previous week.

Interestingly, markets, where new supply is improving the fastest, tend to be higher priced than those that have yet to see improvement, suggesting sellers are more active in the more expensive markets. A failure of new listings to improve beyond the current pace could prove to be an obstacle for further sales improvements, given their strong correlation with sales.

The most recovered markets for new listings included San Jose, Denver, San Francisco, Los Angeles, and Las Vegas, with a new listings growth index between 115 and 137. While San Jose and San Francisco's new listings still outpace January 2020, it’s worth noting that the pace of new listings growth is down considerably compared to December in these metros, which has had a large impact on their recovery scores this week.

Houisng markets where new supply is improving the fastest, tend to be higher priced than those that have yet to see improvement, suggesting sellers are more active in the more expensive markets. More homes being listed for sale in areas with wealthier demographics goes some way to explain the strength of the housing market at a time of recession and rising unemployment.

Are Housing Sales Recovering?

Home sales are recovering from the setback of the coronavirus-led crisis with fall becoming the peak homebuying season. The pace of sales component – which tracks differences in time-on-market – held well above the pre-COVID baseline at 108.6, the same as the previous week but lower than the 114.9 point average over the course of December.

Despite the moderate deceleration, homes continue to move at a record pace for this time of the year and faster than in pre-pandemic times. In other words, homes are selling faster than the same time last year.

Locally, 43 of the 50 largest housing markets in the US are now seeing the time on market index surpass the January baseline, the same as the previous week. The most recovered markets for time-on-market include Los Angeles, Portland, Riverside, Louisville, and Phoenix; with a pace of sales growth index between 135 and 151.

This past week, San Jose and San Francisco saw their ‘pace of sales’ scores fall well below the recovery point. While the time spent on the market in these metros has not significantly risen, it has failed to keep up with the blistering drop-in time on the market seen in late January and early February 2020, right before the onset of the pandemic.

Are Housing Rents Declining?

The rental market appears poised to turn the corner and demand for rental units is expected to surge in 2021. While rising rents is a good sign for rental property owners, it will certainly put millions of renters hit hard by pandemic-related income loss in an even more difficult position, and further government intervention will likely be needed to avoid a painful wave of evictions. In general, there are some significant early signs of trend reversals from what the rental market saw throughout the majority of 2020. These shifts, however, don’t come as a total surprise, as the rental market tends to pick up in the New Year after the holiday season.

Below you'll find various rent reports that highlight year-over-year rent trends and price fluctuations that renters may be experiencing in various parts of the United States.

December's data by Realtor.com shows rents across the nation’s largest 100 counties are continuing their slowdown, with year-over-year trends easing since March across the studio, one-bedroom, and two-bedroom units.

  • In several major and most expensive cities in the country, rents are down substantially compared to last year.
  • The urban tech centers such as the Bay Area, Manhattan, Boston, Seattle, and Washington, D.C all saw the largest declines in rents compared to last year.
  • One-bedroom rents were declining year-over-year in 37 of the 100 largest counties, up from just 6 in March.
  • Two-bedroom rents were declining year-over-year in 28 of the 100 largest counties, up from just 12 in March.
  • San Francisco again topped the list of rent declines in all three unit types with studio rents declining by 33.8 percent, one-bedrooms by 25.5 percent, and two-bedrooms by 22.8 percent.

Apartment List National Rent Report shows that COVID’s impact on the market is continuing to stabilize.

  • The most expensive markets saw rents fall rapidly while several more affordable mid-sized cities experienced accelerating rent growth.
  • Their national index ticked up by 0.1% from December to January, the first monthly increase since last August.
  • Year-over-year, rents are now down by 1.2 percent nationally, a slight increase from the 1.5 percent year-over-year decline that we reported last month.
  • Boise ranks #1 for fastest year-over-year growth, with rents up by 12.4 percent.
  • The vast majority of that growth in Boise occurred from April through October, and over the past three months, rents in Boise have increased by a total of just 0.4 percent.
  • In Chesapeake, VA, rents are up by 8.4 percent year-over-year, but fell by 0.5% this month, the first decline since the start of the pandemic.

Zumper's National Rent Report (February 2021), shows some early signs of reversing the unprecedented rental market trends we saw throughout 2020.

  • Nationally, rents remain slightly up across the country, while expensive coastal cities are still down dramatically compared to a year ago. Nationally, median 1-bedroom rent was up 0.6% from a year ago, and median 2-bedroom rent was up 1.7%.
  • The national 1-bedroom median and 2-bedroom median grew 0.3% and -0.1% at a monthly rate, respectively.
  • Rents continue to be down considerably in historically expensive, coastal cities from a year ago.
  • At the same time, rents in historically cheaper cities throughout the Midwest and Southwest are up considerably from a year ago.
  • Bay Area Shows Early Signs of Rent Growth.
  • For the first time since April 2020, rental prices are increasing at a monthly rate in San Francisco after months of decline in the city and throughout the entire Bay Area
  • The top 8 cities are the 8 most expensive as ranked in the January 2020 report: San Francisco, CA; New York, NY; Boston, MA; Oakland, CA; San Jose, CA; Washington DC; Los Angeles, CA; and Seattle, WA.
  • Second-Tier Cities and New Tech Hubs appear to be declining in price somewhat in recent months.
  • This group that comprises Miami, FL and Austin, TX, is eager to welcome tech companies and workers that are fleeing traditional tech hubs like San Francisco and New York City.
  • These cities have seen a spike in renter searches on Zumper in recent months, which could be a result of price decreases.

Here's a snapshot of January 2021 rental prices in the top 20 largest cities in the country. 

 

national rent price trends 2021Source: Zumper National Rent Report

Apartment Guide’s January 2021 Rent Report shows that rents are rising modestly on one-bedroom apartments and more noticeably on two-bedroom and three-bedroom apartments. This may be due to household consolidation as consumers grapple with the economic pressure introduced by COVID-19.

  • On a national level, prices on studio apartments are down and one-bedroom units are up modestly. In comparison, both two-bedroom and three-bedroom units are up.
  • Studios are down 6 percent from six months ago and down 2.4 percent from one year ago.
  • One-bedroom units are down 3 percent from six months ago, but up 1.8 percent year-over-year.
  • Two-bedrooms are up 3.8 percent from where they were one year ago.
  • Three-bedroom units are up 4.2 percent from where they were one year ago.
  • The West and Northeast regions haven’t been on the same trend line for rent prices in recent comparisons — until now.
  • In both the West and the Northeast, studio and one-bedroom apartments are less expensive than they were a year ago, while two-bedroom and three-bedroom units are more expensive.
  • Of the top 20 cities for rising rent prices across unit types, 31 percent have populations of 500,000 or less.
  • That indicates strong momentum in the rental markets of smaller cities, leaving them well-positioned for further growth.
BEDROOMS 2020 2019 2018
Studio $1,608 $1,648 $1,598
1 $1,598 $1,570 $1,582
2 $1,865 $1,797 $1,798
3 $2,036 $1,955 $1,947

RESIDENTIAL VACANCIES AND HOMEOWNERSHIP RATES  Q3 2020

Vacancy rates affect the price of housing. In a market in which there are a lot of vacant homes or apartments, prospective tenants or buyers are at an advantage. On the other hand, in a market in which vacant homes or apartments are scarce, the power dynamic is reversed. The landlords (or sellers) are in a position to tend to bid up the rents.

Therefore, when there is an unusually low vacancy, the price of housing will tend to be bid up over time. When there is an unusually high vacancy, the price of housing will tend to be bid down over time.

Let us see how this pandemic-led economic slowdown has impacted the vacancy rates nationally as well as regionally. The vacancy rate is somewhat analogous to the unemployment rate. If the unemployment rate increases, it has a direct impact on vacancy rates, just as what happened this year since March.

COVID-19 continues to limit economic activity, yielding higher apartment vacancies, and lower overall rent growth. The Census Bureau reports rental vacancy and homeownership vacancy rates each year through its American Community Survey; you can get these at the city level or in some cases for even more fine-grained areas.

According to the U.S. Census Bureau, the homeowner vacancy rate in 2019 was 1.3%, and the rental vacancy rate at approximately 6.8%. In the third quarter of 2020, the national vacancy rates were 6.4 percent for rental housing and 0.9 percent for homeowner housing.

Approximately 89.9 percent of the housing units in the United States in the third quarter of 2020 were occupied and 10.1 percent were vacant. Owner-occupied housing units made up 60.6 percent of total housing units, while renter-occupied units made up 29.3 percent of the inventory in the third quarter of 2020.

It is interesting to see that the rental vacancy rate of 6.4 percent was 0.4 percentage points lower than the rate in the third quarter of 2019 (6.8 percent) and 0.7 percentage points higher than the rate in the second quarter of 2020 (5.7 percent).

And the homeowner vacancy rate of 0.9 percent was 0.5 percentage points lower than the rate in the third quarter of 2019 (1.4 percent) and virtually unchanged from the rate in the second quarter of 2020 (0.9 percent).

On the other hand, the homeownership rate of 67.4 percent was 2.6 percentage points higher than the rate in the third quarter of 2019 (64.8 percent) and not statistically different from the rate in the second quarter of 2020 (67.9 percent).

Usually larger metro areas have an advantage when it comes to rental properties. They have an abundant supply of renters in the high-income bracket with more disposable income who are willing to compete for the best apartments and rentals. However, industry experts are seeing more positive conditions in many suburban markets.

Buyers of apartment properties are returning to the market, spurred by historically low-interest rates and increased equity financing availability. In the third quarter of 2020, the rental vacancy rate was the highest in Metropolitan Statistical Areas (7.5) percent. Also, it was not statistically different principal cities (7.0 percent).

But suburbs had the lowest rental vacancy rate of 5.5 percent, 1.5 percentage points lower than principal cities. According to The New York Times, an estimated 5% of New York City residents and 18% of Manhattanites alone left the city between March and May. Suburbs like Westchester, Long Island, and North Fork have become other popular sanctuaries inside New York State.

This combination of high demand and low supply has driven prices higher in the suburbs. As affluent New Yorkers are buying houses in suburbs, the real estate market in those areas has prospered. In Manhattan, however, the median rental price decreased by 3.9% between August 2019 to August 2020, and the vacancy rate has increased by 3.15%.

The third quarter 2020 rental vacancy rate in the Northeast (5.6 percent) was lower than the rates in the Midwest (6.9 percent) and South (7.6 percent), but it was not statistically different from the rate in the West (5.1 percent).

The rental vacancy rates in the Midwest and South were higher than the rate in the West, and there was not a significant difference between the rates in the Midwest and South.

The rental vacancy rate in the South was lower than the third quarter 2019 rate, while the rental vacancy rates for the Northeast, Midwest, and West were not statistically different from the third quarter 2019 rates.

rental vacancy rates by regionCourtesy of Census.gov

The third quarter 2020 homeownership rates in the Midwest (71.2 percent) and South (70.8 percent) were higher than the rates in the Northeast (62.0 percent) and West (62.1 percent). The rates in the Midwest and South were not statistically different from each other, nor were the rates in the Northeast and West. The homeownership rates in the Midwest, South, and West were higher than the rates in the third quarter of 2019, while the rate in the Northeast was not statistically different.

homeownership rate


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