Note to readers: Steve Morris (in the above comments) is making baseless and defamatory claims in alleging that my article has plagiarized from other sources ("cut-and-paste some stuff I've read multiple times here and elsewhere"). I have discussed this with my lawyer and am ready for when or if Steve decides to make further libelous claims. Until he can bring forth the evidence of plagiarism, please ignore his claims.
@Mike Dymski glad you enjoyed it, thanks for your recurring engagement with my posts. Writing and analysis runs in the family, I'm afraid. My brother is a financial journalist in London and I fly by night as an amateur writer whose particular interests lay in RE & macro econ. This piece was largely inspired by a 6-month-long argument that my dad and I have been having.
@Joel Hutchinson thanks for the links! Seems dicey that we're seeing the resurfacing of the word "tranches" when describing CLO-type securities. When these start going south, I wouldn't be surprised to see the Fed may start buying them indirectly.
@Steve Morris no one is forcing you to read my posts. Please keep the conversation relevant to the substance of the thread.
“Prediction is very difficult, especially if it’s about the future.” So goes the old saying, but that doesn’t stop people from trying: from pundits to analysts to salesmen, many make grand projections about the future with varying degrees of success and — perhaps more importantly — with varying degrees of integrity. So how does that mesh with an op-ed about the future of the housing market, post-COVID? Predictions about the housing market are perhaps second only to predictions about the stock market in popularity, and you can therefore expect a high ratio of frauds in the mix of self-appointed oracles. What’s my point? Don’t believe most predictions you see, even from (often especially from) folks who sport flashy credentials. That being said, analyzing the market and its components is critical for making educated decisions in the presence of a dynamic market environment. In this article, we’ll highlight the factors you need to be aware of regarding the housing market and some of the possible outcomes that lay ahead.
And with that, let’s get going.
Present FactorsLet’s set the scene. A global pandemic wages war on the economy and society. Entire sectors of the economy are in turmoil. Zombie-companies — Macy’s, Boeing, Exxon Mobile, Delta Airlines — decay in record numbers while enduring a slow, gruesome death. Forty-million Americans have lost their livelihoods. So, what’s the housing market doing? It’s booming.
The irony of today’s booming housing market is perhaps only rivaled by the bonanza happening on Wall Street, except that when you look at the housing market, there are very sensible yet counterintuitive reasons for prices being up on the year. A variety of factors play into it, but the crux of it is that housing supply is diminished for reasons such as reduced home construction and foreclosure moratoriums while demand has stayed strong and purchasing power has increased thanks, in part, to preposterously low interest rates and a 50-year high in the savings rate.
So what has the post-pandemic world brought onto the US real estate market? If using the Case-Schiller 20-Cities Composite Index as a reference, then the prices are up over 7%. However, in looking at our home market of Portland, OR prices are up 15.7% year over year – truly shocking levels of growth. In short (and this is a generalization), prices are up and bidding wars are fierce, leaving buyers in a tough spot.
Forward-Looking FactorsBut for how long will competition be so fierce? Will prices drop? Will the market open up? To guide us, let’s take a look into the future.
Rather than a forecast, we can assess forward-looking factors that weigh heavily on prices and into the decisions we make today. Namely, these are interest rates, government stimulus, delinquencies, home construction, lifestyle changes, and the employment sector.
Let’s start with a fact: mortgage rates are indirectly set by the Federal Reserve’s Federal Funds Rate. It’s a somewhat complicated relationship, but the overall trend is for mortgage rates to track with the Federal Funds Rate. Real estate prices, on the other hand, are inversely related to interest rates. As interest rates drop, housing prices tend to increase – with a drop from 3.75% to 2.75%, a 30-year mortgage payment gets about 10% cheaper for a given price. Low rates increase purchasing power.
So how will rates look in the future? Well, if you take the Fed’s chairman Jay Powell for his word, then we are not going to see rates going up for a long time. Quite literally, the words from Powell’s mouth were “We’re not even thinking about thinking about thinking about raising interest rates[…] we think that the economy will need [very low interest rates] for an extended period”. So will rates go up? I wouldn’t bet on it, so you can expect these rock-bottom-rates to keep upward pressure on prices for a long time.
Will rates go lower? If Powell stays on as Fed Chairman and Janet Yellen is sitting at the head of the Treasury, the momentum for lower rates is greater than for rates going up.
We’ve seen our fair share of government stimulus this year and it looks like there’s more to come. What we have seen are a combination of “helicopter monies” (stimulus checks, extended unemployment, loan/grant programs) and relief programs (relief for COVID treatment costs, renter relief programs) all of which have helped to keep the economy from collapsing and have prevented many people from suffering. That doesn’t mean that we’re not in a recession (or depression, for that matter) and mired in a global pandemic… we’re not out of the weeds, yet, in other words.
As a result, expect more stimulus. Maybe a lot more. Stimulus will balance some of the harrowing symptoms that the economy will suffer, but it’s hard to say how effective it will be. Like interest rates, stimulus of any kind increases purchasing power for individuals and will put largely positive pressure on real estate prices.
Foreclosures and short sales make a up a relatively small portion of the housing stock, but they can have a big impact. How big? Well, remember that little thing called the Great Recession? 2008? Unprecedented financial disaster? Yeah, that was largely caused by mortgage defaults wreaking havoc on a leveraged financial sector. Defaults, in other words, can be significant to the overall equation. The financial system today is not nearly as leveraged with toxic mortgages as it was last time, but a dramatic increase in the default rate could lead to some pretty ugly circumstances. However, it would also flush the market with pent up supply of housing, relieving some of the upward pressure on prices. The size of the impact potential from this is hard to say, but know that 90-day delinquencies are at an all-time high, suggesting that we could see default rates similar to what we saw during the collapse of the last housing bubble.
One wild card this time around is government support. This is a time-bomb waiting to go off, and it’s no secret to anyone pulling the governmental policy strings. Most mortgages are currently eligible for forbearance, and it’s possible that the government could issue an extension of the forbearance program. Personally, I think it’s quite unlikely that the Biden administration would allow a 2008-like default crisis to occur; the political wounds from a tidal wave of defaults would be nearly impossible to recover from in time for the 2024 election. So, it’s perhaps not crazy to expect mortgage protection programs for those facing delinquency. My take? Considering the politics of the circumstance, I don’t expect a carpet-bombing of defaults to hit the market.
New home construction cratered during the pandemic, as sites were shuttered and supply chains wrecked by the virus. However, new home construction has rebounded to previous levels in the past few months, so it seems like construction is back to pre-pandemic levels. That is good news for prices, easing up the tight inventory conditions with new homes.
One issue that is likely to persist, however, is the cost of materials. Even though we’re not in the looney days of August when the price of materials tripled from the March lows, we’re still up there on lumber prices and other key materials. And prices are going up again. What will home builders do? They’ll raise prices to make up for the difference, and with the tight inventory conditions, buyers will have no choice but to swallow the pill.
Here’s a question: Do you need a backyard? Well, if you’re like most Americans this year, the answer to that is a resounding: “hell yes!”
Whereas yesterday’s buyers were looking for urban living quarters in a walkable part of town near some cafes and vintage shops, today’s buyers are leaving city centers in droves and heading to quiet, quaint suburbs to escape the pandemic blues. The data backs this. In Portland, downtown real estate prices are down by north of 10% since a year ago while suburbs like Beaverton and Lake Oswego are booming. Will the vaccine cure everyone and will life be back to normal in 2021? I really, really don’t think so. Most experts project wide availability of a vaccine no earlier than the very end of 2021, which means that social distancing and home offices are very likely here to stay. I expect downward pressure on condos to continue while will immense competition will continue for single-family homes in the suburbs. This is also part of a larger trend of Millennials becoming financially more secure, becoming parents, and let’s face it, getting older.
Think about your social group: know anyone who lost their job, or even their career, as a result of the pandemic? Well, if so, then you’re not alone. Forty-million Americans were jobless due to both government mandated and self-imposed lockdowns, and nearly all of us know someone who was affected by the job losses from earlier in the year. But nearly eight months later, weekly first-time jobless claims are still over eight-hundred thousand. Swaths of the working class are still in a very deep ruts, and it’s likely that more will follow. The number of American “zombie companies” — companies so poorly run that they cannot pay for the interest on their debt — is at a record and climbing. It’s not outlandish to expect bankruptcies in many of their not-too-distant futures, and failing companies —failing industries, in many cases — will equal lost jobs.
Now you might be thinking: “But, Oke, what about the bailouts?” Sure, some of them will happen, and they might work. But it’s really hard to say how much support these failing companies will receive and when that support will kick in. It could be enough, at just the right time. Or it could be too little, too late. Or companies still fail and jobs are still lost, regardless of bailouts.
This one is a huge wild card, and it’s one I’m not willing to make a prediction on. But actually, it’s not like to make a huge difference on the housing sector, largely because of who is unemployed. For high wage workers — the ones buying most of the real estate — the employment numbers look very healthy. It’s for the lower wage workers for whom the employment sector has collapsed, and this — rather grimly — has not much effect on the housing market. So unless white-collar professionals start losing jobs en-mass, the unemployment numbers will not play into housing prices as much as we might think.
So there you have it. Some thoughts on various factors that will effect the housing market, along with my wild-***-guesses for what we might see in the future. Here’s my disclaimer:
I don’t have a crystal ball.
I may be overlooking other variables.
I may be wrong in my assessment of probabilities.
Predictions are hard, and that’s why I’m not saying “prices will go up” or “prices will go down”. The calculus is just too complex and the variables too unpredictable. But what does this mean for you? Well, it means that you’re going to have to make up your own mind on where things are heading. Don’t make your decision based on price trends, and don’t get caught up in what properties were going for last month. The only thing we have for certain is the present, and if you have a good reason to buy or sell, then go for it. I’m keeping my eyes open and am not letting the prices of yesterday get in the way of my motivation as a buyer.
Sources:
https://fred.stlouisfed.org/series/SPCS20RSA
https://fred.stlouisfed.org/series/POXRSA
https://www.census.gov/construction/nrc/pdf/newresconst.pdf
https://www.nasdaq.com/market-activity/commodities/lbs
https://www.pdxmonthly.com/home-and-real-estate/portland-neighborhoods-by-the-numbers-2020-the-city
Thanks to all who read and commented on the post. I’m working on my next writeup which is more future looking. Where do you all think the market is going from here?
@Timothy Lewman great link and good analysis. What do you think the probability that further government foreclosure/recession protections are passed, thus kicking the colloquial can down the road?
@Julio Garcia thanks! Glad you read it and enjoyed. it.
What does it mean to be in the housing market post COVID?
Most of us remember where we were when it became clear that COVID-19 was truly a global issue that would affect Americans. The call for shutdowns came rapidly and started first with municipalities, then states, and pretty soon most of America was locked down in quarantine. As someone who is always tapped into the residential real estate market, one of my first questions was what would happen with housing prices. Would the pandemic induce a decline in demand? What new housing trends would surface? And, in general, what would happen to prices? The reality of what happened is something that few would have expected, and since the pandemics started, the trends have been a general de-urbanization and a rise in prices. Why are prices up, and why are people moving out of cities? The answer is in surprising factors that have had a massive effect to both supply and demand in housing and that have come to define the real estate market of today.
Let’s go over some of these factors in detail.
First is simply the new lifestyle realities that we’re faced with. Teleworking, social distancing, and at-home entertainment has driven up the demand for housing that supports a home-office, self-contained lifestyle. An urban condo or apartment within walking distance to the work office no longer has the same appeal when offices are largely boarded up and along with other urban amenities. A larger house with an office and a nice yard does. The “death of the suburbs” that people were so sure about only a few years ago has completely vanished, yielding instead to a renaissance of suburban and rural living. All this has driven new demand for moving into more suitable quarters for a post-pandemic lifestyle.
Also factoring into housing demand are the micro-economic factors of saving rates and income growth. Savings rates are up significantly, and for the first time ever, Americans have seen an increase in their income through a recession. Many individuals and families who would have spent five or ten grand travelling in a normal year suddenly find themselves with extra cash to put towards a down payment. In the month of March 2020, the savings rate hit an unprecedented 33.7% and even today, at 13.6%, is higher than it has been since the mid-seventies. Others have benefited from the government stimulus programs, either directly or indirectly, driving up their income as a result of the pandemic. Contrary to what many would have expected, a large segment of the population (one from which, as a startup founder, I’m regrettably excluded from) has seen their purchasing power increase through the pandemic. This has led to an all-time-high for median personal income, at $56.5K, and more income means a higher willingness to pay. It’s true that at the same time, housing credit has tightened, but for those in the market, purchasing power has gone up from savings and higher incomes.
And to finish of the demand side of the story, there are macroeconomic effects in play, namely slashed interest rates. If there’s one thing we can be sure of, it’s that when interest rates go down, prices go up. So what would we expect when interest rates go down by 1% in 6 months? For a given price, about a 10% reduction in your monthly payment. Anyone still surprised why prices are up?
To drive the point further, housing supply has also collapsed due to several factors. The CARES Act placed a moratorium on foreclosures, which has dried up of the foreclosures market. To be precise, the current supply of foreclosure properties is down by 78% from last year. That means that for every 5 foreclosed properties entering the market last year, today there is only 1. Further compounding the housing shortage, many who are nervous about the pandemic have put off moving, adding to the share of the housing stock that is frozen. And finally, the pandemic has created turmoil in supply chains, making it more expensive to build new housing. So what you’ve seen happen to the price of toilet paper is also being reflected in the price for materials to build new homes.
So what does this mean for you? Well, as a buyer, it means that it’s going to cost you more to buy a home today than it did earlier this year, especially if you’re looking in the suburbs. Some suburbs, like my beloved Lake Oswego, OR, have seen over 25% increases in median home prices. However, if you’ve always wanted to move to San Francisco or New York City, there’s a chance to do so at a steep discount. As a seller, the current trends mean that it’s likely that you can sell your property for top dollar. Whether the market continues to keep going up remains to be seen. As we’ve already seen during the course of 2020, the market can be swayed by things that are quite hard to predict. So don’t make your decision about price trends, and don’t get caught up in what properties were going for last month. If you have a good reason to buy or sell, then go for it. Personally, as a buyer I’m keeping my eyes open and am not letting the prices of yesterday get in the way of my motivation as a buyer.
What does it mean to be in the housing market post COVID?
Most of us remember where we were when it became clear that COVID-19 was truly a global issue that would affect Americans. The call for shutdowns came rapidly and started first with municipalities, then states, and pretty soon most of America was locked down in quarantine. As someone who is always tapped into the residential real estate market, one of my first questions was what would happen with housing prices. Would the pandemic induce a decline in demand? What new housing trends would surface? And, in general, what would happen to prices? The reality of what happened is something that few would have expected, and since the pandemics started, the trends have been a general de-urbanization and a rise in prices. Why are prices up, and why are people moving out of cities? The answer is in surprising factors that have had a massive effect to both supply and demand in housing and that have come to define the real estate market of today.
Let’s go over some of these factors in detail.
First is simply the new lifestyle realities that we’re faced with. Teleworking, social distancing, and at-home entertainment has driven up the demand for housing that supports a home-office, self-contained lifestyle. An urban condo or apartment within walking distance to the work office no longer has the same appeal when offices are largely boarded up and along with other urban amenities. A larger house with an office and a nice yard does. The “death of the suburbs” that people were so sure about only a few years ago has completely vanished, yielding instead to a renaissance of suburban and rural living. All this has driven new demand for moving into more suitable quarters for a post-pandemic lifestyle.
Also factoring into housing demand are the micro-economic factors of saving rates and income growth. Savings rates are up significantly, and for the first time ever, Americans have seen an increase in their income through a recession. Many individuals and families who would have spent five or ten grand travelling in a normal year suddenly find themselves with extra cash to put towards a down payment. In the month of March 2020, the savings rate hit an unprecedented 33.7% and even today, at 13.6%, is higher than it has been since the mid-seventies. Others have benefited from the government stimulus programs, either directly or indirectly, driving up their income as a result of the pandemic. Contrary to what many would have expected, a large segment of the population (one from which, as a startup founder, I’m regrettably excluded from) has seen their purchasing power increase through the pandemic. This has led to an all-time-high for median personal income, at $56.5K, and more income means a higher willingness to pay. It’s true that at the same time, housing credit has tightened, but for those in the market, purchasing power has gone up from savings and higher incomes.
And to finish of the demand side of the story, there are macroeconomic effects in play, namely slashed interest rates. If there’s one thing we can be sure of, it’s that when interest rates go down, prices go up. So what would we expect when interest rates go down by 1% in 6 months? For a given price, about a 10% reduction in your monthly payment. Anyone still surprised why prices are up?
To drive the point further, housing supply has also collapsed due to several factors. The CARES Act placed a moratorium on foreclosures, which has dried up of the foreclosures market. To be precise, the current supply of foreclosure properties is down by 78% from last year. That means that for every 5 foreclosed properties entering the market last year, today there is only 1. Further compounding the housing shortage, many who are nervous about the pandemic have put off moving, adding to the share of the housing stock that is frozen. And finally, the pandemic has created turmoil in supply chains, making it more expensive to build new housing. So what you’ve seen happen to the price of toilet paper is also being reflected in the price for materials to build new homes.
So what does this mean for you? Well, as a buyer, it means that it’s going to cost you more to buy a home today than it did earlier this year, especially if you’re looking in the suburbs. Some suburbs, like my beloved Lake Oswego, OR, have seen over 25% increases in median home prices. However, if you’ve always wanted to move to San Francisco or New York City, there’s a chance to do so at a steep discount. As a seller, the current trends mean that it’s likely that you can sell your property for top dollar. Whether the market continues to keep going up remains to be seen. As we’ve already seen during the course of 2020, the market can be swayed by things that are quite hard to predict. So don’t make your decision about price trends, and don’t get caught up in what properties were going for last month. If you have a good reason to buy or sell, then go for it. Personally, as a buyer I’m keeping my eyes open and am not letting the prices of yesterday get in the way of my motivation as a buyer.