Housing Market 2021 And Beyond: Boom Or Bust?

So what's going on with the housing market in 2021? Are we getting ready to relive the 2005 market? Or perhaps the 2006 market as it all came tumbling down?

The flashy headlines from the street corner evangelistic style of the talking heads on YouTube have warned that an imminent crash will be here momentarily, but I remain unconvinced. Each of these self-proclaimed experts latch onto one or two statistics and then builds a narrative about how that sole statistic means the end of the housing market as we know it. Fortunately, you have to take in the whole scope of the market and examine the totality of all the facts and statistics before you render judgment.

Am I concerned about the housing market? Yes! Are home values moving higher at too rapid a rate? Yes! Am I concerned about home affordability for the average Joe? Absolutely. Are all these concerns leading to a housing correction where values fall for a period of time? I don't think so.

If you want to really understand the market forces driving the housing market and use this information to forecast the likeliest outcome in housing, then you have found the right report. No preaching, just facts! No bold headlines, just an examination of the US housing market from a guy who has been brokering homes for the past 30 years. Here's what I believe you show know:

US Housing Market Forecast Video

Supply & Demand Determine Home Value Change

The first thing to remember when somebody is throwing a bunch of "facts" at you is that supply and demand is the dynamic that determines the direction of home values. Nothing else matters.

So when you are told that every home purchased in 2021 will be foreclosed upon, then you have to ask yourself "how will this impact the supply and demand for homes in my market area." When you hear that the Secretary of HUD has been abducted by aliens, again, consider how that will impact the supply and demand for homes in your market area. No matter what the talking heads say, you simply have to take it in, determine if it is believable, and then consider its impact on the supply and demand for homes in your area.

Now, not everything being spouted on YouTube about real estate is crazy. There are a lot of people out there who share solid facts, it's just the quick conclusions they reach that warrant a deeper dive into the data. I will attempt to take each point that impacts the supply and demand for homes at the national level and critique it based upon information that is available today. If you feel that I have left an important issue out of my report, please comment below or call, text, or email me so that I can improve this report.

Unlike my normal reports, I'm going to NOT drill-down to my local market in Tallahassee, rather I am going to keep the focus on the entire US housing market. I have always claimed that Tallahassee is a great bellwether for the overall US market, and today's report will demonstrate the truth of this claim.

Major Market Forces Impacting The Housing Market

In order to assess current housing market conditions for the purpose of forecasting future real estate market movements, I am going to identify market forces, segmented by whether they impact supply or demand, and then provide some graphs and analysis on the ones most likely to impact home sales.

Before proceeding, I want to address the supply and demand dynamic to ensure that we are on the same page moving forward. When supply and demand are balanced, history has shown an annualized appreciation rate of just under 3.5%. As a general rule, prices (and values) move higher when the market favors sellers (less inventory), while prices and values move lower when the market favors buyers.

This is not a dynamic unique to the real estate market, it is true with every commodity. When demand outpaces supply, prices move higher. When supply outpaces demand, prices drop.

The Supply Side Of The Housing Market

The next several graphs and my analysis are focused on the issues that will impact the supply side of the housing market.

Foreclosures - The issue of foreclosures due to lost jobs from COVID-19 is perhaps the hottest issue raised by the housing market doomsayers. They correctly point out that the moratorium on foreclosures is creating a backlog that will flood into the market when the moratorium is finally lifted.

On this point, I agree that the worst-case scenario, as it can be measured right now, is just under two million foreclosures that could occur and bring a quick volume of supply to the housing market. What they don't consider however, is the state of the supply and demand for homes right now.

Back in the great recession of 2008, it has been estimated (by the Chicago Fed) that approximately 3.8 million foreclosures entered the market between 2007 and 2010. The market they entered though is significantly different than is the market today.

First of all, the supply of homes for sale had been high for years, thus property values had fallen roughly 30%. So the 3.8 million foreclosures entered an over-supplied market suffering from depressed values, and it took years to consume these additional homes.

Today, the market is grossly under-supplied, and equally as important, it is also awash with equity.

Equity In The Housing Market

The great recession foreclosures had no equity, that's why they ended up being foreclosed upon. Today, the majority of the 1.8 million estimated foreclosures have enough equity to sell before the banks are forced to complete the foreclosure.

The record-high level of home equity in the market means that many of those distressed sellers will walk away from closing with a check. They will be served foreclosure papers, but they'll be able to sell their home on their own and avoid actual bank foreclosure.

The legal foreclosure process generally can’t start during the first 120 days after a borrower falls behind on a mortgage. After that, once a servicer begins the legal process, the amount of time the borrower has until an actual foreclosure sale varies by state. It could be (rarely) as quick as five months and as long as several years if you hire a competent foreclosure defense attorney. Regardless of where the US home is located, there is adequate time for the owner to put the home on the market and sell it for top dollar. Remember, supply is low, demand is high, it's a great market to sell a home, even if you do not want to do so!

In the graph above, the blue line measures aggregate home equity in the US. Look at the year 2008, equity had fallen dramatically, though the debt measured far higher than ever. Today this dynamic has reversed.

This is a hugely important point that most doomsayers do not seem to understand. A foreclosure occurs when you fail to make your payments, but that doesn't mean you give your house to the bank. If you have equity in the property, you sell the property and repay the bank. This is not 2008!

Now, you might be thinking, when 1.8 million homes enter the market (over the course of several months to a year), it might change the supply and demand dynamic. And I will tell you, it most certainly will.

In a positive way!

The Relative Supply Of Homes For Sale In The US

We need more homes, and those foreclosures (though very sad for the current owners) will be well-received by buyers trying to find a home today.

The graph above plots the supply of homes for sale each month in blue, and then measures the relative supply in red (supply, relative to the current rate of demand). The red line shows clearly that the relative supply of homes for sale is at an all-time low. This is the reason that most markets are experiencing bidding wars on most properties priced below the top 15% of the market.

This historic-low level of inventory means that the market is nowhere near the condition it was in back in 2006 when demand began to fall. The supply of homes for sale back in 2006 and 2007 was approaching 4 million homes, whereas, in December 2020, there were just over 1 million homes! This market is grossly under-supplied, that's why the red line has collapsed to a frightening level below 2 months of supply.

This low inventory level means that there are not enough (estimated) foreclosures in the pipeline to have an adverse effect on the market. I suspect, should all 1.8M enter the market, it will have a calming effect, bringing the months of supply of homes up to a level that will slow the hyper-inflating home appreciation rates that we are dealing with right now.

The next major issue the doomsayers will point out is that the current foreclosure estimate is just a drop in the bucket, as there are millions of borrowers using forbearance as a way of postponing their foreclosure.

Mortgage Loans In Forbearance

Mortgage loan forbearance is the term used when a lender allows a borrower to temporarily pay less or nothing on a loan for a pre-determined period of time. When COVID struck, lenders were quick to announce forbearance for a long period of time.

In fact, there have been several extensions and some people might push their forbearance on payments out to 18 months of zero payments. The doomsayers believe these borrowers' homes will all be added to the foreclosures mentioned previously, and thus swamp the market with significantly more inventory. I'm not so sure.

The graph above shows the status of existing US home loans. It was produced from data gathered by the Federal Housing Finance Agency and it goes through the third quarter of last year.

Can you notice any trends in the graph?

• Only 1% of mortgage loans are estimated to be between 30 to 60 days past due
• Less than 1% of mortgage loans are estimated to be 90 to 180 days past due
• Less than 1/2 of 1% of mortgage loans are estimated to be in foreclosure, bankruptcy or in the process of being terminated with a deed in lieu of foreclosure
• 5% of mortgage loans are estimated to be in forbearance

As of two weeks ago, the Mortgage Brokers Association (MBA) estimated that 2.6 million homeowners are in forbearance plans.

Something that is not shown in the graph is that the loan forbearance programs allowed people to opt-in without significant proof of financial necessity. This means that many of those in forbearance are people who were concerned about the pandemic and wanted to stockpile cash when their lenders gave them that option.

Ultimately, it's hard to guestimate how many of these loans in forbearance will make their way to the market through default, but these will occur after the loan foreclosure wave that first hits the inventory later this year or early next year. Remember, loans in forbearance will be started and it will take a minimum of 120 days of late payments to start the foreclosure process, meaning we won't likely see any current loans in forbearance show up as foreclosures in 2021.

Builder Homes

I have been clamoring for builders to step up the pace of construction. Demand is so high that anything with four walls and a roof will sell today.

The graph above plots new construction home sales each year against the total population in the US. The number of new homes built and sold is shown in red and measured on the left vertical axis.

Builders stepped up production in 2020, but it was nowhere near the level required to fulfill demand. Even with heightened demand and historic-low inventories, builders only produced enough homes to tie for the eleventh-best year on record for new construction homes.

Knowing that contractors build homes to earn their living, I am confident there has to be a reason why the pace of construction is so low.

I found the following quote from the National Association of Home Builders that brings some clarity to this issue:

"A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability." - National Association of Home Builders Chief Economist Robert Dietz

So the explanation from the builders makes sense. The cost to build homes right now is through the roof, and while existing homes are moving up in value, they are doing so at a slower rate than at which building costs are currently rising. We'll have to take a wait-and-see position for builders to heavily return to the housing market.

I do believe builder costs will not continue to rise as fast as will existing homes, so I'm expecting new construction to recover. Builders will have to pay close attention to the supply of distressed homes entering the market to ensure that we don't see the market flip to an oversupply.

130 Years Of US Home Prices

So just how fast are home prices rising? The following graph of US Home Prices was prepared using data from two separate publications by Robert J. Shiller and is current through the end of 2020.

This graph parallels my own records from the Tallahassee housing market for the past thirty years. On average, the price of homes has risen 3.46% each year since 1890, but home prices are moving higher at a faster rate since 1965.

From 1890 to 1965, the average growth rate for home prices was just 2.3%, but the growth rate has risen by more than double since that time as prices have moved at an average annual rate of 5.0% since 1965.

I do have real concerns that we'll see this rate of growth move even higher as many states move to increase the minimum wage faster than has ever been done before. In Florida, the minimum wage has risen 55% since 2005 (the end of the last housing expansion phase) but will move more than 75% higher over the next four and one-half years. Couple rising wages with the rising cost of diminishing land, and we shouldn't be surprised to see the rate of home price growth double again.

Summarizing The Supply Side Of The Housing Market

Before we move on to demand, let's ensure we have a good grip on supply.

The market is currently dealing with historic-low levels of homes for sale in most US housing markets, where buyers are ending up in bidding wars for 85% of the homes. The graph of supply shown previously showed only 1.9 months of supply (where six months is typically considered a balanced market).

There are those that believe we'll see a flood of inventory stream into the market when foreclosure moratoriums are lifted and forbearance programs expire. I agree with this belief, but I don't see it as a negative. I see this as market-positive news (with respect to those who will lose their homes).

It is my belief that there is a combination of equity in the market as well as a need for these homes that will prohibit the market from tilting out of control on the supply-side. These homes are needed, many of the current owners have equity, and the market will comfortably consume them in less than a year or two (the rate will depend on the aggressiveness of the lenders forcing foreclosure actions).

Finally, there are the homebuilders. From 2004 through 2006, it was the homebuilders whose failure to pump the brakes on new construction that drove the supply-side of the housing market far beyond what was needed. This glut of supply took ten years to consume before the market returned to equilibrium.

But not today. Builders are struggling with soaring prices. Much is due to the pandemic, but in the Southeast, Hurricane Michael had already put a hurt on materials needed for new home construction. It will take more appreciation in the existing homes market (or falling material costs) before builders can ramp up production.

So that's where we stand on the supply-side, let's flip over to the demand side of the housing market.

The Demand Side Of The Housing Market

The next several graphs and my analysis are focused on the issues that will impact the demand side of the housing market.

Population Growth Continues

The US population continues to grow, and an overly simplified thought is that more people will need more houses.

The size of the population is a primary reason why there are more home sales in an area like Tampa, Florida with several million people than there are in my market area (Tallahassee, Florida) with several hundred thousand people.

The US is growing, though it appears as if the growth rate is receding slightly. I am not highly confident that the 2020 US Census was as accurate as the previous years when there was not a global pandemic interfering with the process. Time will tell, but the continued growth of the population suggests that we will see the continued growth of the housing market, though population growth in itself does not mean the market is immune to market corrections.

Household Growth Forecast

While the overall growth of the population does impact housing, it is the demographic changes occurring that will have a stronger impact on home sales in the coming years. Perhaps the greatest demographic change is in the group of people most likely to buy a home.

As an aside, if you really want a good study on the state of the US housing market, you should annually read "The State Of The Nation's Housing" which is published by the Joint Center For Housing Studies Of Harvard University. It is packed full of non-headline producing content that is far more valuable than you will find from most shock-inspired YouTube videos.

The following was taken from the Harvard report, and it shows why the changing of the guard, from Baby Boomers to Millenials, will have a strong impact on the housing market now and for several years into the future. The report states:

"Demographic changes favor homeownership. The Census Bureau’s most recent population estimates point to strong growth in the number of 30–44 year olds, the age group most likely to purchase homes. In fact, adults in this age range accounted for half of total population growth between 2018 and 2019. In addition, the economic fallout from the pandemic has had a relatively modest impact on higher-income households, another demographic group likely to purchase homes."

Again, I encourage you to read the report, as it meticulously breaks down the economic fallout from the pandemic which has not been equally born across all demographics.

Employment Rate - A Prime Factor In Demand

For most people buying a home, qualifying for a mortgage is a critical step in the home buying process. One major component of this qualification is employment.

According to the US Bureau of Labor Statistics, the current unemployment rate has fallen from 14.7 percent in April down to 6.2 percent in February of 2021. This means the current rate is just slightly higher than the 30-year average, but roughly 80 percent higher than the pre-pandemic rate of just 3.5 percent.

We have to take in the full picture of unemployment. First of all, I truly feel for anybody who has lost a job for any reason. Though I did not know it at the time, the pre-pandemic economy was one of the best ever when you consider how strong the employment rate was. That is why we can be so close to a 30-year average yet be so much worse off than just a little more than a year ago.

Again, with respect to those that have lost jobs that have not yet been restored to full employment, the pandemic did not fairly distribute the losses, as the majority of the remaining losses are for lower-wage jobs that are not a major component of the housing market.

If you want a more in-depth study on lost jobs, I again encourage you to read the Harvard Report, it does a far better job than I can do explaining the impact of unemployment on the current and future housing markets.

Equity In The Market Impacts Demand Too

Though we addressed the historic-high equity when previously evaluating the supply side of the housing market, it's important to understand that it also has a beneficial impact on the demand side of the market.

Many move-up buyers have enough equity in their homes today to comfortably buy a larger home without having to come out of pocket for the down payment, as the equity in the current home more than covers this requirement.

Equity in the market is one of those double-whammy factors that most doomsayers only seem to notice when there is no equity, yet they forget that equity is often a positive factor for homeowners. Today, homeowners have more equity than ever before!

Mortgage Interest Rates

If I had to choose the scariest factor that could negatively impact the demand side of the housing market, then mortgage interest rates would be first on the list.

The demand side of the housing market has been heavily fueled by historic-low mortgage interest rates. The graph above plots more than fifty years' worth of average monthly mortgage interest rates, and December 2020's 2.68% is the lowest of the 602 months plotted. If you closed on a loan in December of last year, you should high-five your family members, because it appears as if you timed the market to perfection!

The reason that mortgage interest rate change scares me so much is that at some point, rates are going to move higher. Currently, rates are at near all-time record lows, and they eventually have to start moving higher. Will they move higher this year? Next year? Three years from now? I have no idea. But they will move higher.

When mortgage interest rates begin the inevitable move to higher ground, the pace at which rates rise will determine the impact on the market. Rates ticked up slightly the past two months, but not enough to negatively impact the market. In fact, there are some buyers jumping into the market as they feared the low-interest rate window of opportunity was closing.

The pace at which mortgage interest rates rise, when they do begin to rise, will determine how much rates impact the market. If rates move slowly (rising less than 1% each year), there won't be an insurmountable sticker shock for buyers. Remember, as rates rise, home affordability declines.

Even with small moves, we will see luxury home sales cool. Though I do not have a national statistic, I can tell you that 78% of the buyers in my market area that fell within the top 1% of the market over the past 18 years borrowed money when they purchased their luxury homes. This group of buyers will be squeezed quickly with rising rates.

I believe we won't see rates rise substantially in 2021, and the pace that rates rise will directly relate to the pace of the economic recovery across the country. As I have said in previous reports, the Fed is somewhat trapped with competing interests on mortgage rates.

The Fed will need to keep the funds rate low to help the overall economy recover, but at the same time, it's going to be concerned about hyperinflation in the housing market. I suspect we'll see rates stay fairly low for the foreseeable future, and it's my belief this will keep the housing market flush with capital for 2021 and 2022 if not longer.

Tightened Lending Policies

Though the cost of money is cheap, there is another factor that could slow the housing market when it comes to mortgage lending. What will happen if lenders tighten their lending policies.

Remember, a major factor in the housing market collapse before the great recession was the new loan programs that popped up allowing anybody with a pulse to borrow money. These programs ignored key default indicators like credit history and income verification, and thus created a limitless pool of money that drove the market higher. When these loan programs went away, so too did demand.

Ignorant doomsayers think today's heightened demand is partially the result of similar loans. This is just not true. The buyers coming through my office are as strong financially as I have ever seen. This observation is backed up by the Harvard report too, which writes:

... data from the New York Fed Consumer Credit Panel and Equifax show that credit scores for borrowers of newly originated home purchase mortgages have generally been on the rise for two decades. From a low of 698 in the second quarter of 2000, the median credit score jumped to 743 in the first three quarters of 2003 and then held near 720 through the end of 2007. Since then, the median score fluctuated around the 760s before climbing to 770 in the fourth quarter of 2019. By the second quarter of 2020, the median score stood at 784—its highest level in records going back to 1999.

Understanding that today's buyer's creditworthiness is stronger than ever, it is more likely that we'll not see a major tightening of lending standards. We have seen some wrenching-down on investment loans (loans real estate investors use to buy homes that are leased out to tenants), but I believe interest rates will cool demand to adequately appease lenders' needs to tighten the screws on people buying as owner-occupants.

Foreclosed Owners Out Of The Market

We covered foreclosures in our analysis of the supply side of the housing market, but we also need to consider them on the demand side as well.

Why? Because this niche group of people are clearly part of the pool of people who traditionally own homes, yet they will not likely be buying in the next several years.

Many lenders require a minimum waiting period after a foreclosure before a buyer can apply for a new mortgage loan. The waiting period for FHA loans is three years, it's seven years for Fannie Mae/Freddie Mac loans, and just two years for VA loans for military and veteran borrowers.

Thus, if we see four million foreclosure sales, that means we'll see the buyer pool shrink by four million people that will not return for two to seven years. Of course, as mentioned prior, the number of foreclosures sales will be greatly reduced due to the equity in the market and the ability of distressed homeowners to sell their homes on the open market and to avoid a foreclosure sale.

Summarizing The Demand Side Of The Housing Market

Though there are other factors that could impact the demand side of the housing market, I believe I have addressed the most pressing ones. So let's put it all together.

Demand for homes is very strong right now, and my primary concern about sustaining this level of demand rests on the back of mortgage interest rates. Currently, rates are at near all-time record lows, and they eventually have to start moving higher. I don't think it will happen in a rapid manner in the next two years, but when it does, the pace at which rates rise will determine the impact on the market.

Population growth continues in the US, albeit at an apparently slower rate than before. Remember, more people = more home sales. Also, the shift in the demographics of the population, from baby boomers to millennials means that more people are entering the primary home-buying stages of their lives. Everything about our population analysis suggests that the demand in the housing market will be growing.

Employment is an interesting variable because the pre-pandemic unemployment rate was at an all-time low. Currently, the unemployment rate is very near the 30-year average, and time will tell if the Biden Administration can get the economy back to pre-pandemic levels. Even if it does not, it does appear as if the economy will be "better than average" and we should expect better than average support for home sales from our economy.

Many buyers have more cash than ever! Why? Because their current homes have more equity than ever. The equity in the housing market has never been higher, thus buyers have more fuel to add to the fire that is today's housing market.

There does not appear to be any substantial tightening of lending policies coming our way, as today's borrower is stronger than any we've seen in the past twenty-one years. High credit scores and a strong repayment history do not require a damper from lenders.

One reduction in the overall demand picture will be those traditional homeowners who have to sit out over the next two to seven years due to a recent foreclosure. The size of this segment of the buyer pool is not likely to be significant, as many people who will be served with papers starting the foreclosure process have enough equity in their homes so they will be able to sell on the open market and avoid a foreclosure sale.

Overall, the demand for homes looks to remain strong for the foreseeable future.

Housing Market 2021 And Beyond: Boom Or Bust?

After a fairly exhaustive study of both the supply side and demand side of the US housing market, I believe the prospects for US home sales for the next few years are very good. Though mortgage interest rates are a variable that could singularly work to reverse this view, it is more likely that we will see mortgage interest rates move higher at a rate that dulls demand, but does not kill it.

The doomsayers hang their hats on unemployment, foreclosures, and forbearance, but we've adequately addressed why these should not put an unbearable burden on the market. The impact of the global pandemic on US wage earners has been unequally born by lower-wage earners, far less so by the segment of the population that is likely to be buying homes.

The growth of the buyer pool coming from the millennial demographic comes at a time when home affordability is going to decline. Wage inflation (and in fact, all inflation) is only going to add fuel to the hyperinflation in housing.

Inflation - The Consumer Price Index

Ultimately, I believe we will see the housing market move to a point where demand gets stronger, but the ability to fill that demand will decline because the cost of new homes will not fall within the budgets of a large portion of the buyer pool. This will put more pressure on wages and I think we should prepare to experience a period of heightened inflation in the US. 

The graph above plots the consumer price index in blue for the past 105 years and the yellow dotted line shows the five-year average. The past five years have seen the average flatten slightly, but I suspect five years from now we'll then see far more than just compensation for the flattening.

Elevated costs will likely result in a strong move in new construction towards attached housing and multifamily housing as the primary method to reduce the end-cost to the consumer. This will be a very long-term trend. People who invest in single-family detached homes today will be rewarded with excellent equity growth.

You should expect to see home values rise at a faster rate over the next 24 months than you have ever before seen in a 24-month period of time. Homeownership has many benefits, and for the foreseeable future, the financial benefit might be the greatest of all.

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