Why Housing Market Momentum Continues in 2021
(Reprint from First American Economic Center Blog – By Mark Fleming)
In the final month of 2020, the market potential for existing-home sales reached its highest point since 2007, rising to a 6.18 million seasonally adjusted annualized rate (SAAR) of sales.
While the winter months are traditionally real estate’s slow season, the housing market had one more surprise for us in 2020 as our measure of the market potential for existing-home sales showed the housing market again broke with traditional seasonal patterns during this unprecedented year.
“Twin housing market accelerates – record-low mortgage rates and the demographic boost from millennials, the largest generation in U.S. history, aging into their prime home buying years – super-charged demand.
Yet, the housing market also faces a historic and worsening inventory impasse – you can not buy what is not for sale.”
In 2020 the growth in house-buying power fueled by low mortgage rates was the primary driver of housing market potential, while existing home owners choosing not to list their homes for sale was the most significant headwind,
Fortunately, the potential sales increase from house-buying power was more than the loss from rising tenure length in 2020.
House-Buying Power, Millennials Super-Charge Housing Market Demand House-buying power, how much home on can afford to buy given their income and the prevailing mortgage rate, is a key driver of home-buying demand.
The primary reason for the increase in house-buying power in 2020 was falling mortgage rates. Since December 2018, the 30 year, fixed-rate mortgage fell by slightly more than one percentage point.
Holding household income constant at its December 2019 level means potential home buyers gained nearly $60,000 in house-buying power from falling mortgage rates alone.
If you factor in household income growth, home buyers gained approximately $87,000 of total house-buying power in 2020.
Because an increase in house-buying power allows a potential home buyer to purchase more home for the same monthly payment, increased house-buying power helped super-charge the housing market potential.
Compared with one year ago, falling mortgage rates and rising incomes for those still employed resulted in nearly 389,000 potential home sales in December 2020.
Rising Tenure Squeezes Housing Market Supply
Existing-home sales make up approximately 90% of all sales, sot the rising tenure length of existing homeowners means fewer and fewer homes for sale and is the primary reason for the lack of housing supply.
As existing homeowners have increasingly chosen not to list their homes for sale during the pandemic, the average tenure length – (the amount of time someone lives in their home) – has soared to a historic high of approximately 10.5 years, up from an average of 10 years just one year ago in last November’s existing-home sales report, months’ supply hit a historic low of 2.3 months.
That means it would take just over two months to run out of homes for sale at the current sales pace.
The lack of homes for sale caused by the increase in tenure length reduced the potential for existing-home sales by 170200 in December compared with a year ago.
What should we expect in 2021???
More of the same, but in a more favorable economic environment.
The successful dissemination of a vaccine should end the “stop-start” pattern of restrictions imposed on businesses, helping the economy recover.
Lower mortgage rates will continue to support strong house-buying power as more and more millennials age into home ownership, keeping demand robust.
While the supply-demand imbalance will persist, existing homeowners who were hesitant to sell amidst the worst of the pandemic may be encouraged to bring their homes to market, relieving some of the supply shortage.
Swelling demand and the potential for greater supply means housing market potential in 2021 is likely to remain strong and build off a historic 2020.