Housing Inventory Hit Record Lows in 2020. Will This Change in 2021?

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March 16th, 2021 – Housing inventory declined 39.6% on a national level in 2020, making 2020 the lowest housing inventory year on record, according to Realtor.com. Adding to the record-breaking low inventory this past year has been increased buyer demand — although, saying “increased demand” is an understatement. Zillow (NASDAQ: ZG) (NASDAQ: Z) calls the persistent demand for homes we’ve seen in 2020 “insatiable.”

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Low inventory and high demand lead, of course, to increased housing prices; in this case a 13.4% increase, which translates to a national median of $340,000 as of December 2020. But where are we headed in 2021?

Some background: sellers

To understand 2021, let’s first look at the reasons the 2020 market has been, shall we say, unique. Part of the reason for low inventory in 2020 was seller uncertainty. And not uncertainty about whether homeowners can sell; the uncertainty comes from what they’ll do after they sell.

Because of this insatiable demand for housing, homeowners are torn on what to do. On one hand, they can get top dollar for their home (assuming it’s in reasonable condition) if they list now, and quickly too, as houses aren’t staying on the market long. But many are afraid they might not get another house they can afford in this market. So homeowners are generally holding on to what they have, slightly more now than last year, further decreasing inventory.

As far as foreclosures: While more are expected to happen in 2021 due to people losing their jobs from the coronavirus pandemic, depending on how the new administration reacts regarding stimulus and forbearance, there might not be the numbers of foreclosures as there normally might otherwise be, further lessening supply.

Some background: buyers

Another reason for low inventory is increased motivation of buyers. There are several reasons for increased buyer demand.

1. Record low mortgage rates: Low mortgage rates have been causing people on the fence to take a stand and buy already.

2. Millennials age up: This group of 24- to 39-year olds who have been putting off homebuying longer than past generations is finally settling down.

3. The coronavirus pandemic (a reason for practically everything in 2020): People who were content as renters in urban cities started leaving for social distancing reasons. Their destination: the suburbs and exurbs, particularly since working from home has become a thing — not to mention as cities locked down, there was nothing much to do in them anymore.

What to expect in 2021

The real estate market always tries to reach equilibrium: the perfect match between sellers and buyers. But that can take time. Because the 2020 market was nowhere near this — instead, a huge sellers’ market — 2021 will be trying to reach equilibrium. So expect to see more of the same until this equilibrium happens: low inventory, high demand, rising prices, and low interest rates.

Inventory

Whenever the supply of new homes on the market is below 6.5 months (a number which represents how long it will take to sell the existing supply), builders become confident to build more homes. As of December 2020, the supply of new homes was 3.3 months — representing a supply so low that builders are not merely confident; they’re downright excited to start building.

Not only is the supply of new homes low, so is the supply of existing homes on the market. Due to high demand, existing homes are also selling fast. As of December 2020, there’s a 2.5-month supply, an all-time low.

So expect to see more housing starts in 2021, but since builders like to get top dollar, don’t expect them to overbuild.

Demand

Demand for houses should remain high in 2021. Low interest rates have a lot to do with this: rates aren’t expected to go much higher than 3% for 2021. Combine that with millennials entering their homebuying years, and demand should remain strong this year.

Prices

The way the market handles low inventory combined with strong demand is with rising prices. This year, prices might rise to the point of keeping many first-time buyers from being able to purchase, as coming up with a down payment could prove to be too big a hurdle. With that said, savings are at historic highs, so many first-time homebuyers, although they don’t have home equity in their arsenal, they do have money in the bank.

Interest rates

There have been no announcements by the Fed of an increase in interest rates anytime soon. If the economy improves due to getting a handle on the coronavirus and a new administration, rates could start to go up from these all-time lows, but since they are hovering around 2.5% at 2021’s start, even if they do rise in 2021, they will still be at historically low.

Are you ready for this spring market? Talk To Tammy, 636.931.9100!

First-Timers Shocked / Market Update January 2021

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First Time Homebuyers Shocked by How Much Home They Can Afford

February 23, 2021 – Low mortgage rates, financial assistance from parents, and personal savings are helping first-time buyers stretch their housing budgets more than they thought they could, according to a survey from realtor.com® of 1,000 prospective and recent first-time home buyers. More than two-thirds of survey respondents say they are surprised at what they can afford; 47% say their budget is larger than they thought it would be.

“The dramatic decline of mortgage rates in 2020 was a pleasant surprise for many buyers,” says George Ratiu, senior economist at realtor.com®. “For first-time buyers, the drop in the 30-year mortgage rate from 3.65% in March 2020 to a record low of 2.65% in January has provided unexpected leverage. Lower rates allowed many buyers to stretch and buy more expensive homes while keeping their monthly budget the same.”

Still, many first-time buyers acknowledge having to compromise on their recent purchase, and nearly half of survey respondents say they have been outbid on homes they wanted to purchase. Twenty-one percent of respondents had to expand their housing search to less expensive neighborhoods, 20% had to increase their housing budget, and 18% had to eliminate some items on their wish lists, such as a garage, large backyard, finished basement, or pool, the survey shows.

First-time buyers also are saving for a home faster than they expected. Half of recent first-time buyers surveyed say they were able to save for a home in less than three years by putting aside a portion of their paycheck each month, cutting out discretionary spending, and saving lump-sum payments like tax refunds. Also, many first-time buyers are getting help from their family: 52% of Americans who bought their first home in 2020 say they received down payment assistance from friends or family, most notably their parents.

Buyers Snatch Up New Listings as Quickly as They’re Available

Home sales could easily be 20% higher if more homes were for sale, says Lawrence Yun, chief economist of the National Association of REALTORS®. Existing-home sales—completed transactions for single-family homes, townhomes, condos, and co-ops—rose 0.6% in January compared to December 2020 and are up nearly 24% over a year ago, the National Association of REALTORS® reported Friday. All four major regions of the U.S. recorded double-digit annual gains for home sales in January.

“Home sales continued to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market,” Yun says. Seventy-one percent of homes sold in January were on the market for less than a month, according to NAR’s report.

While most of the economy has felt the toll of the lingering COVID-19 pandemic, the housing sector has remained a bright spot, Yun adds. Sales remain high and home prices have continued to rise, adding equity to home sellers.

“Home sales are continuing to play a part in propping up the economy,” Yun says. “With additional stimulus likely to pass and several vaccines now available, the housing outlook looks solid for this year.” Yun predicts employment to increase, which could spur even more homebuying over the coming months. He predicts existing-home sales to reach at least 6.5 million in 2021.

Here’s a closer look at key indicators from NAR’s existing-home sales report, reflecting January sales data:

Home prices: The median existing-home price for all housing types in January was $303,900—a 14% jump over a year ago.

Inventory: Total housing inventory at the end of January was 1.04 million units, down nearly 26% from a year ago. Unsold inventory sits at a 1.9-month supply at the current sales pace.

Days on the market: Properties typically remained on the market for 21 days in January, down from 43 days a year prior.

First-time buyers: First-time buyers comprised 33% of sales in January, up slightly from 32% a year earlier.

Cash sales: All-cash sales accounted for 19% of transactions in January, down from 21% a year ago. Individual investors or second-home buyers tend to make up the biggest bulk of cash sales. They accounted for 15% of sales in January, down from 17% in January 2020.

Regional Breakdown

Here’s how existing-home sales fared in January across the country, according to NAR’s report:

  • Northeast: Existing-home sales dropped 2.2% in January, but are up 24.3% compared to a year ago. Median price: $361,400—up 15.8% from January 2020
  • Midwest: Existing-home sales rose 1.9% last month, a 22.7% jump from a year earlier. Median price: $227,800—a 14.7% increase from January 2020
  • South: Existing-home sales increased 3.2%, up 25.1% from January 2020. Median price: $263,300—a 14.6% increase compared to a year ago
  • West: Existing-home sales fell 4.4% compared to a month earlier but are still up 21.3% compared to January 2020. Median price: $461,800—up 16.1% from a year earlier

Are you ready to buy a new Home?  Talk To Tammy, 636.931.9100