Welcome to 2021 and the ever changing real estate market. To know where we are, we need to examine where we have been. 2020 was a challenging year for all. But surprising to most was not only how resilient the real estate market was despite the pandemic, but how truly important housing became. For many, home suddenly became their new office or their children’s classroom. Stay at home orders meant more time spent at home. Renovation projects increased markedly. Refinancing soared. Outdoor spaces were updated and repurposed as the new living room. Appliance stores reported highest ever sales.
What most people did not anticipate is that demand would continue at such an elevated level right to the very end of 2020, largely ignoring the traditional seasonal patterns. Meanwhile on the supply front, homes for sale dropped to the lowest levels ever. Lowest. Levels. Ever. The scarcity of the supply of homes for sale is shocking even to those of us who have practiced real estate for over 40 years. Anyone who isn’t involved with buying or selling real estate likely has no idea the market is so hideously unbalanced in favor of sellers. To quote Michael Orr of the Cromford Report “Supply is collapsing at a jaw-dropping rate across large areas of the valley, especially those mid-price suburbs. However, supply has been a problem for many years and we sound like a broken record when we talk about it… the tiny number of listings available right now is even lower than almost anyone imagined possible just a few months ago.” Demand seems unquenchable gobbling up the supply almost the moment it arrives on the market. Even the luxury price ranges are experiencing record breaking sales and supply is unusually low. Our number one source for inbound relocations to the valley is California, where by comparison, two people are leaving for every one that arrives. Our luxury market is a bargain compared to California pricing. In fact the only exception on supply shortage appears to be the 55+ community. Although that market still favors sellers, there is far more supply in the age restricted areas. Not surprising really, given the population most vulnerable to the virus would be less likely to attempt a move.
As our market is experiencing seemingly unending demand with strongly evaporating supply, it may seem counterintuitive that fear rather than greed is the emotion of the day. But many are concerned about the economic underpinnings of unemployment and the expiry of governmental programs that temporarily prop up delinquent homeowners and renters. Add to that the not too distant memories of the run-up in 2005 followed by plummeting prices amidst a tsunami of foreclosures; the fear is understandable. However, this market is dramatically different than the 2005/2008 market for a variety of reasons. First, back then we had more homes for sale than we had people to fill them. Builders were building at a rate that overwhelmed demand. Today, builders are building at about a third of the level they were then, and not in sufficient quantity to equal demand. Simply put, there are not enough homes today. Second, delinquent homeowners who bought even just a year ago can sell their homes (rather than foreclose) thanks to the equity buildup rising prices provides. Third, lenders are loaning to people with fully documented income and credit. In 2005 lenders were offering zero down loans with no income documentation or credit check (fondly referred to as “Ninja” or “No No” loans – no income, no job, no assets). Fourth, rental rates have soared 15% in just the last 6 months. With record low interest rates it is cheaper to buy a home than to rent one, despite rising prices. Still not convinced? No one summarizes it better than Michael Orr:
“People who are worrying about mortgage delinquency rates should remember that foreclosures did NOT create the huge excess supply of 2006. The excess supply arrived 2 years before the foreclosures started in earnest. When the bank owned homes hit the market, it was already dreadfully over-supplied, so their prices dropped sharply. If we saw a new wave of distressed homes right now, they would be soaked up very quickly by eager buyers and prices would continue to rise. It would help move the market back to a more normal balance, so prices would rise at a more moderate pace. Most distressed homes would be unlikely to get to foreclosure because almost all of them have substantial owner equity and can be marketed as normal sales, or at worst pre-foreclosures, not short sales (which can often be tricky to close).
The current situation is very different from 2004 or 2005. Then a large number of newly built homes had been purchased by investors with 100% loans and were lying unoccupied with no tenants interested in renting them, despite record low rental rates. Many other homes had been purchased by owner-occupiers on fraudulent loan applications, who never even made the first monthly loan payment, living in their new home for free with minimal money down. Loan fraud was rampant in 2005 and 2006, largely driven by the mortgage industry itself rather than the borrowers. Wall Street firms (like Lehman Brothers) demanded mortgages to chop up and sell as securities and mortgage brokers could not supply enough without resorting to abnormal practices focused mainly on sub-prime loans. Remember Countrywide and Washington Mutual? Stated income loans? No documentation loans?
I repeat – 2020 is nothing like 2005. The 2020 housing market is not abnormally pumped with artificial credit, just starved of supply. Forecasting the future is extremely difficult, but drawing parallels with 2005-2008 is not helpful, nor is it logically appropriate”
Prices & supply
So what will 2021 bring in terms of pricing? Forecasting is a thankless job and one that is bound to fail. But we anticipate prices to rise for the first half of the year (and possibly for the next 2 years). Why? Again, there is just not enough supply. In shortages of supply – prices rise. That leads to the most important question, when will supply rise to normal levels (defined here in the valley as 28,000-30,000 properties)? It is likely going to take years to balance this market given that current supply is only around 6,000 properties for sale. To correct the imbalance, Builders will need to build in more volume, delinquent owners will need to place their homes on the market, and those who need to sell for personal reasons (family formations, divorce, job relocations, etc.) do so. Perhaps even the vaccine will allow for more homes to be placed on the market as jobs resume and migration accelerates. Of course this market imbalance will not last forever. Pricing at some point will dampen demand – as the law of supply & demand dictates – allowing for a larger build up on homes on the market. At that time prices will level off or even fall.
Whatever 2021 shall bring, we will be here to report it to you. Here’s to a bright 2021!
Russell & Wendy Shaw (Mostly Wendy)