Friday, March 5, 2021 / by Troy Schlicker
In March when cities and states began pandemic related shutdowns, real estate brokers and clients took an initial pause and then scrambled to respond to the changing landscape. Record-low interest rates caused historic mortgage activity leaving some lenders to halt new underwriting, and many homeowners had to consider whether they wanted to put their home on the market. The initial days of uncertainty soon ushered in a period of unprecedented demand in the local Austin real estate market as well as nationally. We ended the year with the average home price up 11.6% to over $450,000 in Austin and the days on market cut in half.
As we approach the spring market which is typically the busiest time for housing activity, you may question whether the good times will continue to roll on. If you’re a homeowner, should you take advantage of this opportunity? If you’re a buyer, should you jump in and risk paying too much? I have answers to some of your most pressing questions below.
How is today’s market different from the one that caused the 2008 meltdown?
At the beginning of the pandemic, fears of an economic recession and an ensuing mortgage meltdown were top of mind for homeowners all across the county. This was a reasonable reaction for many buyers and sellers, as the two seemed to go hand in hand, just as they did during the economic crisis and real estate meltdown of 2008.
The reality however is quite different. The conditions that we experienced in 2008 and the ones that triggered the current downturn are significantly different. For starters the housing market has been a major bright stop over the last year. This is in line with historical patterns, as housing prices traditionally hold steady in the face of recessions, with homeowners staying put and investors putting their money into tangible, physical assets to ride out the uncertainty of the stock market.
After learning their lessons, the hard way in 2008, banks have been better funded, homeowners have been holding onto more of the equity they have accrued in their homes, and, crucially, much of the economic activity is focused on financial factors outside of the housing market. As many industries make quick pivots to work-from-home setups, initial fears of widespread job loss related foreclosures have failed to materialize. In fact, due to the increase equity homeowners have in their properties increased unemployment would still be unlikely to result in large numbers of foreclosures. Federal stimulus payments and the Paycheck Protection Program also aided in offsetting some of those who were most impacted by the shutdown.
Are we facing a real estate bubble?
A real estate bubble can occur when there is a rapid and unjustified increase in housing prices, often triggered by speculation from investors. In these situations, there can be a sharp drop in home values when investors quickly exit the market to minimize losses or take advantage of other investment opportunities or if there are an excessive number of foreclosures. This leads to excess supply driving home prices down and will lead to reduced and occasionally negative equity for home owners.
Contrast that with the current market conditions where rising home prices are based predictably on the historically low interest rates and significantly limited supply of homes. The basic principles of supply and demand are working just as they’re supposed to. Experts predict the strong seller’s market to continue throughout 2021. Additional inventory from homeowners and increase new construction should allow supply to gradually rise and meet demand. This will gradually slow the rate of housing inflation.
Effects of low interest rates
According to Freddie Mac, the historically low rates we currently have are projected to continue through the rest of 2021. This helps contribute to home affordability even in a market like Austin where homes values continue to rise rapidly. These low rates should power continued activity in the housing market and economy in generally for the foreseeable future.
Effects of low inventory
Scarce levels of inventory is having a significant impact on the rising home prices, numerous multiple offer situations and minimal time for homes to stay on the market. This should gradually ease as we continue to return to more normal work and life conditions and homeowners who have long-delayed selling put their homes on the market as well as home builders increasing productions levels to meet the high demand.
Aren’t some markets and sectors looking particularly weak?
One of the major stories of the pandemic was the mass exodus from attached home communities and high-priced urban areas as both young professionals and families migrated towards the larger square footage and open spaces of suburban and rural markets. When main of the countries largest employers made work from home policies permanent this trend was only reinforced.
This has caused speculation on the death of cities and the end of the condo market. However, those rumors appear to be premature and greatly exaggerated.
In recent months and with the first vaccine rollouts, renters have begun to return to major urban centers, attracted by the sudden rise in available inventory and discounted rental rates. Additionally, buyers who had been primarily focused on single-family homes have responded to the low inventory by taking a second look at condos. Nationwide condo prices continue to lag behind those of detached homes, there are still significant price increases and lower days on market year over year in the condo market as well.
The great migration of 2020 has also spread some of the economic wealth to cities, suburbs and rural enclaves that haven’t always benefited as much. The increased property values in these areas will help revitalize the local economies of these communities for years to come.
How has COVID affected the “seasonal” real estate market?
Frequently, the real estate market is viewed as a seasonal phenomenon focused around spring and early summer. However, the widespread shutdowns in March 2020, which came right at the beginning of what would traditionally be the start of peak real estate season in most areas has seeming led to a protracted and seemingly endless “hot spring market.”
Douglas Duncan, the chief economist for Fannie Mae predicts slower growth in 2021 than the historic numbers we saw in 2020 but these estimates are national numbers. Austin appears likely to match or even exceed the growth it saw in 2020 as the first couple of months have outpaced their counterparts last year and with a likelihood of returning to business as usually by the 3rd quarter there is expected to be a lift in the housing market over the second half of the year as well.
Overall, most indicators are showing overwhelmingly positive signs for real estate throughout the rest of 2021 and beyond. Pent-up demand and consumer driven policies, along with interest rates that continue to be at historically low levels and potential rising inventory, should help homeowners increase their equity. Additionally, the increase in long-term work-from-home policies will continue to boost many sectors of the housing market, both now and for years to come.
STILL HAVE QUESTIONS? WE HAVE ANSWERS
While economic trends and indicators are national, real estate is local. I’m here to answer your questions and help you understand what’s happening in your neighborhood. Reach out to learn how these larger movements affect our local market and your home’s value.