October 2021 Real Estate Market Update

October 14, 2021

"October" with pumpkins in the background on a wooden table top

 

My sense is the Case-Shiller National annual growth rate of 19.7% is probably close to a peak, and that year-over-year price increases will slow later this year. Bill McBride, Calculated Risk

 

To put some context on what is happening in the market with prices right now, let’s look at the latest year-over-year home price appreciation.

July 2021 Year-Over-Year House Appreciation THE FHFA at 19.2%, Corelogic at 18%, and S&P at 19.7%. https://www.corelogic.com/intelligence/u-s-home-price-insights/ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA-HPI-Monthly_9282021.pdf https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20210928-1443774/1443774_cshomeprice-release-0928.pdf

 

This dramatic home price appreciation is a factor of the recent supply and demand imbalance we have talked about over the past months. We simply have not had enough homes on the market for the demand from buyers, which caused prices to rise.

 

Closings are set to decline roughly 10% year over year in 2nd half of 2021 and home price appreciation is on the cusp of flipping to a decelerating trend. Ivy Zelman, Zelman & Associates

 

When the experts start speaking of “decelerating trends,” they are not projecting depreciation, just a slower, more moderate home price appreciation. This is where understanding the difference between depreciation and a decelerating trend is paramount to understand what is going on in the market. To help clarify, let’s look at the estimated home price performance from the Home Price Expectations Survey.

 

Estimated home price performance from December to December shows 2021 at 11.74%, 2022 at 5.82%, 2023 at 3.94%, 2024 at 3.56%, and 2025 at 3.55%. https://pulsenomics.com/surveys/#home-price-expectations

 

Through the remainder of 2021, home prices are expected to increase or appreciate (11.74%). So, a slowing of the appreciation we are seeing at 17% and 18%. Then looking ahead, prices are expected to appreciate on a more moderate level – an average of 5.7% through 2025. Home prices are continuing to accelerate, just at a slower pace. The combination of continued home price appreciation, and increasing mortgage interest rates, means buying now could be critical to a long-term wealth advantage.

 

Fall is usually the start of the slower season for the housing market, but nothing is usual in today’s pandemic-driven housing market. Potential homebuyers are seeing a slight rise in inventory and consequently rushing back into the fray. Mortgage applications to purchase a home jumped 7% last week from the previous week... That is the highest level since April of this year. Diana Olick, CNBC’s Real Estate Correspondent

 

Forecasters are struggling with the forecasts for the remainder of this year. To understand why this is, let’s take a look at the annualized home sales for 2019, 2020, and 2021.

 

And the bottom line is home sales are very difficult to forecast right now because of these three lines. What this is, is annualized home sales from 2019, 2020 and the green line, 2021. And what you see there is that 2020 was nothing like a normal year which we saw in 2019. So, if we want to go back to a normal year, we have to go back to 2019 and look and say, OK, what did that look like? Because we know what the pandemic brought. It brought this orange line here on the screen, the dip down, the rise back up. And we sort of did double duty in the second half of last year when we packed all of that business into a short amount of time after the lockdown. https://www.realtor.com/research/data/

 

Business slowed during the lockdown in 2020 when people were taking their homes off the market due to uncertainty. We then saw a tremendous end to 2020, as people began to feel more comfortable, and we seemed to be making up for the missed business earlier in the year. Then in 2021, it looks like we are headed for less business year-over-year, compared to 2020. The reality is that the second part of 2020 was unusual, and making up for a crazy time in the market. Let’s also not forget we are trending well above 2019 – which was a very good year in real estate.

 

Existing home sales in 2012 was 4.9M, 2013 4.870M, 2014 5.07M, 2015 5.45M, 2016 5.51M, 2017 5.56M, 2018 5M, and 2019 5.53M. nar.realtor https://www.nar.realtor/topics/existing-home-sales

 

2019 was the best year in real estate (with the exception of 2017) in the past decade. Remember how to put it into perspective when the news tries to taunt us with the scary headline that, “We’re down year over year.” We are below prior year because it was unusual with the lockdown and we packed a year’s worth of business in the latter part of the year, but, despite this, we are well above 2019 – one of the best years in real estate over the past decade.

 

Active listings peaked in august in 2017, September in 2018, and October in 2019. https://www.realtor.com/research/data/

 

Typically, we see listings (homes coming to market) peak in fall. This was the case for 2017, 2018, and 2019.

 

Active listings peaked in April 2020. https://www.realtor.com/research/data/

 

However, in 2020 monthly listing counts peaked in April.

 

In 2020, as listings decreased, sales increased. https://www.realtor.com/research/data/

 

In 2020, as listings decreased, sales increased.

 

And the big question becomes: When will listings peak this year? Listing could either grow, and we eclipse where we were in 2020, which would be a huge relief on pricing. Or, listings flatten out, and we intersect where we were in 2020 at some point. Finally, listings could begin to dwindle, and cause more price appreciation. https://www.realtor.com/research/data/

 

And the big question becomes: When will listings peak this year? Listings could either grow, and we eclipse where we were in 2020, which would be a huge relief on pricing. Or, listings flatten out, and we intersect where we were in 2020 at some point. Finally, listings could begin to dwindle, and cause more price appreciation.

 

However, it seems as if we will see continued listings going into this fall. First, because of pent up seller demand, and homeowners being more comfortable putting their homes on the market. Second, new construction. Building is starting to take off as material prices start to equalize. Third, and finally, the end of forbearance will create new listings. Not a wave of foreclosures, but it will create a time in the market for people that say, “We can’t afford the home any longer, and we’re going to have to sell it.” In addition, the recent price appreciation may cause people to want to take advantage of that equity and move.

 

The single biggest risk to housing—rising mortgage rates—is a real possibility in the next year, and that could bring prices down. Further, other economic, financial, and confidence challenges could also result in a drop or flattening of home prices, even with solid buyers in place. But a drop or flattening in home prices is a far cry from the crash we saw during the Great Recession. Ali Wolf, Chief Economist at Zonda

 

Interest rates are becoming a hot topic in the market right now. It’s going to become more expensive for people to borrow. Right now the 30-year fixed just jumped above 3%.

 

Many factors led to this increase, including the Federal Reserve communicating that it will taper its support of the capital markets, the broadening of inflation and emerging energy supply shortages which compound other labor and materials shortages. Sam Khater, Chief Economist at Freddie Mac

Mortgage rates trending down from 3.7% in January 2020 to 3.01% today. http://www.freddiemac.com/pmms

 

We see the Fed starting to taper on buying in the mortgage market, causing interest rates to go up.

 

Mortgage rates projections averaged from Freddie mac, fannie mae, mba, and nar for q4 this year is 3.18%, q1 of 2022 at 3.33%, q2 of 2022 at 3.45%, and q3 of 2022 at 3.55%. http://www.freddiemac.com/research/forecast/20210715_quarterly_economic_forecast.page? https://www.fanniemae.com/media/41126/display https://www.mba.org/news-research-and-resources/research-and-economics/forecasts-and-commentary https://cdn.nar.realtor/sites/default/files/documents/forecast-q3-2021-us-economic-outlook-07-29-2021_1.pdf

 

Around the middle to the third quarter of next year, interest rates are projected to be about 3.5%. Interest rates are on the rise. So what is the cost of waiting?

 

a $300,000 home today at a 2.7% interest rate. With the home price appreciation projections, and interest rate projections, that could mean a monthly payment increase of $72.45 or a difference over the life of the 30-year loan of $25,938 if the purchase doesn’t happen today, but happens in the fourth quarter of this year.

 

Let’s look at an example of a $300,000 home today at a 2.7% interest rate. With the home price appreciation projections, and interest rate projections, that could mean a monthly payment increase of $72.45 or a difference over the life of the 30-year loan of $25,938 if the purchase doesn’t happen today, but happens in the fourth quarter of this year. It’s going to cost more to purchase and finance a home in the months (and years) to come.

 

The Home Price Expectations Survey shows that if you look at a $350,000 home over the next five years, the purchaser of that home stands to gain just over $111,000 in gained equity based on forecasted appreciations for the next five years. https://pulsenomics.com/surveys/#home-price-expectations

 

The Home Price Expectations Survey shows that if you look at a $350,000 home over the next five years, the purchaser of that home stands to gain just over $111,000 in gained equity based on forecasted appreciations for the next five years. Homeownership cannot only accumulate wealth, but be an effective hedge against inflation, because you have a fixed payment.

 

As always, thanks for keeping updated with us, and we look forward to updating you again next month!

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