The pandemic changed the direction of consumer spending from a focus on services to a focus on physical goods. For many, it also accelerated the rate at which people built savings. With the addition of hyperlow mortgage rates, homebuying became more accessible to a higher number of people in 2020. The housing undersupply is also contributing to increasing home prices, as well as the large increase in mortgage rates since January.
Even as offices become safer, we anticipate people will continue working remotely, even if only partially. Increased remote work changed housing priorities, contributing to the increased demand. Additionally, as COVID-19 cases continue to decline and vaccinations increase, our futures look more certain. This means that the period of all-time-low mortgage rates is ending, which may boost demand even further over the next several months as buyers try to lock in low rates. Housing demand is expected to remain high for many years.
Is History Repeating?
As home prices are continuing to rise, many people are asking if we are in the midst of another bubble. Will we experience a housing market crash as we did in the past? In order to understand the magnitude of price movements in 2020, we can look at the Case-Shiller 20-City Home Price Composite Index, the leading measure of residential real estate prices in major metro areas. As you can see from the chart below, we look at a 20-year view of the housing market.
Until the late 1990s/early 2000s, homes acted as more of a store of value rather than a risk asset, in that home prices generally kept up with inflation. For instance, a home bought 30 years ago would be the same price today after adjusting for inflation pre-2000. In the early 2000s, home prices rallied due to loose lending standards/predatory lending, mismanagement of risk, and negligence of financial institutions, which led to the greatest recession since the Great Depression.
Home prices took about six years (2006–2012) before they began to meaningfully recover, and the early stages of recovery (2012–2014) were the strongest until 2020. The last time home prices rose as sharply as 2020 was March 2006, which was the time home prices peaked prior to the 2008 financial crisis. To be clear, we aren’t comparing 2006 to 2020 in terms of risk. The housing bubble that occurred between 2004 and 2006 was largely caused by financial institutions.
In 2020, homes appreciated because of market factors: a greater number of people saved more than expected, and mortgage rates fell to historic lows. This caused the supply to drop to the lowest level since the National Association of Realtors started recording inventory in 1999.
Mortgage rates rose significantly, slightly over 50 basis points, since January 2021. This increase in mortgage rates equates to about a 6.5% rise in the monthly 30-year fixed mortgage cost. Usually, this would hamper demand—which it will—but supply is so low that it won’t matter much from the seller’s point of view. Sellers can still expect multiple offers on their listings. If rates rise another full percentage point, we could see a more dramatic drop in demand.
The environment is right for demand to outpace supply in 2021 just as it did in 2020. In the short term, we may even see a demand spike as potential buyers try to purchase before rates rise higher. As a result, we anticipate a competitive landscape for buyers over the course of this year. The current increase in home prices is due largely to market factors, not financial institutions so we do not anticipate history repeating.
East Bay Market Update
Single-family homes are massively undersupplied relative to demand, causing prices to appreciate further. In February 2021, the median single-family home price rose to an all-time high in both Alameda and Contra Costa Counties. Year-over-year, East Bay prices increased considerably, up 16% in Alameda and 29% in Contra Costa.
Single-family home inventory dropped even further in January and February of 2021, which speaks to the East Bay’s desirability. In February 2021, the East Bay had over 500 fewer homes for sale than it did in February 2020: a 15% decline. At the same time, the number of homes sold was up 20%. With such a massive decline in inventory, prices will likely continue to appreciate throughout 2021.
In summary, as we enter the spring season, we expect demand to remain high and new supply to be absorbed quickly. Low home supply will continue for the foreseeable future, increasing bidding wars and driving up prices. Overall, the housing market has shown its resilience through the pandemic and remains one of the most valuable asset classes.
While the market remains competitive for buyers, the market is making it an exceptional time for homeowners to sell. Low inventory means multiple offers and fewer concessions. Because sellers are often selling one home and buying another, it is essential that sellers work with the right agent to ensure the transition goes smoothly.
Like many careers, wisdom gained through experience becomes invaluable. During this unique time, we encourage you to hire an agent who has successfully navigated market cycles and is, therefore, able to best advise you on your buying and selling strategies. At Arrive Real Estate Group, we remain committed to helping our clients achieve their current and future real estate goals. Contact us today with any questions about the current market or to request an evaluation of your home.