Talk of a real estate bubble is beginning to crop up every where I look. Reddit, Quora, Instagram, even while I’m just walking my dog haha. Obviously all these questions are because home prices continue to go up and buyer demand remains at all-time high (seriously its insane. Side note: sell now if you can)
But the questions remains will home prices drop?
When you look at the numbers it is a reasonable question. Appreciation of residential real estate is well above historic annual averages. According to the Federal Housing Finance Agency (FHFA), annual appreciation since 1991 has averaged 3.8%. Here are the latest 2020 appreciation numbers from three reliable sources:
So it’s easy to jump to the conclusion that house appreciation is out of control in today’s market. However, we need to put these numbers into context first.
The COVID Impact
Let’s call a spade a spade the pandemic has made people want more space. If you live in an apartment you want a bigger one, if you live in a townhouse you want a house, if you live in a house with no yard you want a yard. All of this has created unprecedented demand.
Unfortunately the virus has also forced many would be sellers to NOT list their homes (number of new home listings is 60% below what was expected locally) for health and safety reasons. Nationally, the inventory of homes for sale decreased 39.2% over the past year in November…This amounted to 490,000 fewer homes for sale compared to November of last year.
Basic supply and demand. No inventory, tons of demand prices go up.
The COVID Vaccine is coming
It seems likely that in the 1st Quarter of 2021 the COVID Vaccine is going to be getting out in the United States. So what does this mean?
Well just thinking logically:
- schools are going to go back at some point
- downtown offices are going to re-open
- people will have to go back to work
- Restaurants & Bars will reopen
Most importantly sellers will start to feel safe again!
So you are going to have all the people who would normally sell in 2021 PLUS all the people who wanted to sell in 2020 but didn’t. Buyer needs and demands will likely change as the world returns to normal.
That’s why major organizations in the housing industry are calling for much more moderate home appreciation next year. Here are the most recent forecasts for 2021:
- National Association of Realtors: 4.5%
- Freddie Mac: 2.6%
- Fannie Mae: 2.1%
- Mortgage Bankers Association: 2%
Is this like 2008?
The answer is yes and no.
No in the sense that back in 2006, dubious adjustable-rate mortgages taxed many buyers’ budgets. Some loans didn’t even require income documentation. Today, buyers are taking out 30-year fixed-rate mortgages. Fourteen years ago, there were 3.8 million homes listed for sale, and home builders were putting up about 2 million new units. Now, inventory is only about 1.5 million homes, and home builders are underproducing relative to historical averages
Yes in the sense that there are MAJOR market & economic issues that have not been dealt with yet that at some people will come home to roost. Mortgage and Rental Defaults are up but you cannot be evicted. Water bills are not being paid (normally a HUGE no no) but these bills have been pushed. Mortgage forbearance issues caused by the March 2020 Cares Act. Massive commercial vacancy. Huge debt defaults.
SOMETHING is coming. Will it be like 2008? No I doubt it but could it be like some of the other downturns we have seen over the last 50 years. Absolutely.
Most aspects of life have been anything but normal in 2020. That includes buying and selling real estate. High demand coupled with restricted supply has caused home prices to appreciate above historic levels. With the end of the health crisis in sight, we will see price appreciation return to more normal levels next year.