Middleton Elite Coaching’s insight into current and projected real estate market conditions – July 2021.

When is the housing market going to crash?

According to Google, searches for this question have increased by 2,450%.

Our client base of top real estate agents, real estate teams, and brokerages is being asked the same question.

If you’ve followed Middleton Elite Coaching’s previous Market Trends articles, you know that we approach real estate market forecasting through the lenses of supply and demand. 

Spoiler Alert: this is not a bubble.

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A few recent headlines from NAR’s Existing Home Sales Report:

• Median home prices were up 23.6% compared to last May
• 89% of homes were on the market less than 1 month  
• Existing home sales were down for the 4th straight month (wait, what?)

Home sales fell moderately in May and are now approaching pre-pandemic activity.  Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.

 – Lawrence Yun, Chief Economist of the National Association of REALTORS

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What’s happening with Supply?

A recent CNBC article reported an increase in new listings of 5.5% compared to last June, and 10.9% compared to May of this year.

Not so fast, though.  The same article also reports:

The inventory of homes for sale was down 43.1% year over year at the end of May, representing 415,000 fewer homes for sale on a typical day in June. That is, however, an improvement from the more than 50% declines seen in March, April, and May. New listings, again, were higher, but still well below the pre-pandemic average for June.

While the above information suggests that buyers might get a little bit of breathing room this summer, real estate market inventory is still near all-time lows.

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Home Builders are struggling to catch up, too.  

National Association of Home Builder Chief Economist, Robert Dietz, recently shared: 

As expected, new home sales have continued to soften this spring. While higher prices have shifted some buyers to the sidelines, NAHB survey data indicates that approximately 20 percent of builders have limited sales activity in recent months in order to manage supply-chains of materials and labor availability.

In a study conducted by the National Association of REALTORS® to address the nation’s shortage of housing, researchers noted:

…in order to fill an underbuilding gap of at least 5.5 million housing units during the next 10 years, while accounting for historical growth, building would need to accelerate to a pace that is well above the current trend, to more than 2 million housing units per year. This would represent an increase of more than 700,000 units per year, or approximately 60%, relative to the pace of housing production in 2020 of less than 1.3 million units.

We’re a long, long way from having supply available to match demand.

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How might homes in forbearance impact supply?

Currently, approximately 2 million homeowners are still in forbearance, according to Black Knight research.  A recent CNBC article also outlined:

Mortgage servicers, in general, want to keep as many borrowers in their homes as possible, since the foreclosure process is very expensive. They can perform loan modifications, lowering the interest rate, and can also tack on all the missed payments to the end of the loan. While there is a so-called waterfall of options, the final one is selling the home, which in today’s very pricey housing market, could even net some borrowers a small profit.

We believe the data suggests that foreclosures, as a result of the expiration of the forbearance provisions of the CARES Act, will have a minimal impact on supply.

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What’s Happening with Demand?

As a quick refresher, there are 3 key factors driving real estate demand:

1. Affordability (via low interest rates and government/economic stimulus)
2. Demographic Trends (notably Baby Boomers and Millennials)
3. Migration Patterns

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• Affordability

All current projections indicate that interest rates will remain low for the foreseeable future.  

  PREPARED BY THE ECONOMIC & HOUSING RESEARCH GROUP http://www.freddiemac.com/research

According to Freddie Mac’s market outlook, mortgage rates are expected to continue to rise throughout 2021, with an expected rate increase of about 0.1% per quarter. We can expect to begin 2022 with rates on a 30-year fixed around 3.5% and end the year with rates closer to 3.8%.  Other interest rate predictions mostly mirror that of Freddie Mac’s.

One key policy decision to watch is the impact that the Biden administration’s infrastructure plan, currently being crafted with Senators from both parties, will have on housing.  The current version of the plan includes a lot related to tax changes, potential tax credits, and more.  As the final version of the proposal gets ironed out, we’ll keep you updated.  

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• Demographic Trends

We’ve covered the macro demographic trends extensively in previous articles.  It was fun to see that Merryl Lynch’s Capital Market Outlook gave a hat tip to what we’ve been sharing with you for nearly a year by saying:  

There are reasons to believe that this is likely to be an unusually long and strong housing expansion. Demand is very strong because the biggest demographic cohort in history is moving through the household-formation and peak home-buying stages of its life cycle.

Other interesting facts being driven by Demographic Trends:

• Affluent Americans are rushing to retire, according to Bloomberg.

About 2.7 million Americans age 55 or older are contemplating retirement years earlier than they’d imagined because of the pandemic, government data show… and many cite robust retirement accounts and Covid-19 fatigue for their early exit, according to interviews with wealth managers and federal surveys.

• Baby Boomers are beginning to distribute a record stockpile of wealth to their heirs, according to the Wall Street Journal.

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• Migration Patterns

For a refresher on where people are moving to, check out our past post with studies from U-Haul and United Van Lines.

To add an interesting wrinkle to migration patterns, check out NAR’s recent Vacation Home Counties Report.  Here are the highlights:

• In 2020, vacation home sales rose 16.4%
• The top 1% of vacation homes are concentrated in 16 states
• North Carolina has the highest number of counties in the study at 4
• The South Atlantic division saw a 31% increase in vacation home sales in 2020

Vacation homes are a hot commodity at the moment…with many businesses and employers still extending an option to work remotely to workers, vacation housing and second homes will remain a popular choice among buyers.

 – Lawrence Yun, Chief Economist of NAR

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Summary

If asked, how would you answer the question “when is the housing market going to crash?”

Consider these key points for an informed conversation:

✔ The real estate market is hot. 

✔ Rates are projected to remain low. 

✔ Economic policy appears to be mostly favorable at the moment. 

✔ Demographic trends favor the housing market for the next decade or more. 

✔ Migration patterns are being influenced by early retirement, people’s desire to continue to work from home, and purchasing of vacation homes. 

✔ Supply remains low relative to demand. 

✔ Builders have a long road ahead of them to catch up. 

All data suggest that the real estate market will continue to stay hot for the foreseeable future. 

Be Elite!

Bill, Debbie, and the MEC Team