March 16, 2021 – Why House Values Have Soared During a Crisis. During the COVID-induced recession of last year, home appreciation actually accelerated.


Economic Commentary

Why House Values Have Soared During a Crisis. During the Great Recession, a little more than a decade ago — the value of real estate was hit significantly. We spent ten years recovering as values reached pre-recession levels and then some. During the COVID-induced recession of last year, home appreciation actually accelerated. Just recently, CoreLogic confirmed that house values rose 10% year-over-year in January. The question is why have values responded so drastically differently this time around?

The first answer to that question involves history. Before the Great Recession we had a huge increase in home prices accompanied by loose underwriting standards and accommodated by a significant ramping up of new home building activity. Before the COVID recession we did not have loose underwriting standards and builders were not building enough homes to accommodate household formulation. Finding homes for sale was difficult before the recession hit. The decade-long growth in home values increased the equity of the average homeowner, who no longer was following the mantra of “no money down” when purchasing.

When the recession hit this time, not only did we start with more equity in homes and latent demand, we began with the decision to delay foreclosures and allow forbearance which immediately caused the listing shortage to become worse. Fewer would move to list their home while in quarantine as well. Add increased demand because so many were in remote working conditions and needed more space while spending so much time at home, and we had plenty of ingredients fueling bidding wars. Of course, it did not hurt that we also had record low interest rates making homes even more affordable than renting. We could add a few more factors, but we think that this paints a fairly complete picture. The next question is—what happens when the COVID-recovery is complete? Expect plenty of speculation on this question in the coming months.

Weekly Interest Rate Overview

The Markets. Rates rose slightly in the past week and the pace of the increases continues to moderate. For the week ending March 11, Freddie Mac announced that 30-year fixed rates increased to 3.05% from 3.02% the week before. The average for 15-year loans rose to 2.38% and the average for five-year ARMs increased to 2.77%. A year ago, 30-year fixed rates averaged 3.36%, over 0.25% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “As the economy improves given labor market optimism, continued vaccination roll-out and additional stimulus pending, mortgage interest rates continued to increase this week. But even as rates rise modestly, the housing market remains healthy on the cusp of the spring homebuying season. Homebuyer demand is strong and, for homeowners who have not refinanced but are looking to do so, they have not yet lost the opportunity.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

More Americans are planning to move this year due to the flexible work from home lifestyle that the Covid-19 pandemic has ushered in, market researcher The NPD Group said in a recent blog post. Nearly 20% of people in the country are working from home full time as of December and 28% of Americans have considered relocating during the pandemic, NPD said. In addition, 20% more consumers are planning to move this year compared with the prior year. NPD’s comments come as winter winds down and the peak months for moving, May through September, are ahead. As people get more comfortable with the ability to work from anywhere, they are realizing that they don’t have to be pinned down to a certain location near an office in order to provide for themselves or their families. This gives them the ability to live in an area with a lower cost of living or that is closer to family, NPD said. As a result of the increased interest in moving, sales of moving supplies and services have shot up. Last year, online sales of portable and bulk storage categories grew at a pace that was five times greater than the prior year. NPD said it expects that growth to continue into 2021. Sales also grew at office supply stores and at hardware retailers. Source: CNBC

Housing market potential is positioned for growth in 2021, according to First American’s potential home sales model. First American, reported in its recent study that potential existing-home sales increased to a 6.17 million seasonally adjusted annualized rate (all stats represent SAAR), a 0.4% month-over-month increase. This represents a 77.1% increase from the market potential low point reached in February 1993. Contributing factors include mortgage rates (which will remain close to 3%), millennials forming households, and more existing homeowners tapping into equity to upgrade. Today, potential existing-home sales is 712,052 million, or 10.3% below the pre-recession peak of market potential, which occurred in April 2006. Furthermore, the market for existing-home sales outperformed its potential by 3% or an estimated 183,790 sales, and the market performance gap increased by an estimated 136,731 sales from December 2020 to January 2021. First American’s Chief Economist Odeta Kushi says housing-demand dynamics offset the negative impact of the country’s limited supply of for-sale homes. “Millions more millennials will age into their prime home-buying age in 2021, and they will do so at a time of historically low interest rates,” said Kushi. “Working against them is the extremely limited supply of existing homes available for sale, especially homes priced for first-time homebuyers. In January, the positives of market demand overcame the negatives of supply, fueling a boost of approximately 512,000 potential home sales relative to one year ago.” Source: DSNews

S&P Dow Jones Indices, New York, said its S&P CoreLogic Case-Shiller Indices reported a 10.4% annual gain in December, up from 9.5% in November. The 10-City Composite annual increase came in at 9.8%, up from 8.9% in the previous month. The 20-City Composite posted a 10.1% year-over-year gain, up from 9.2% in the previous month. Eighteen of the 19 cities reported higher price increases in the year ending December 2020 versus the year ending November. Month over month, before seasonal adjustment, the U.S. National Index posted an 0.9% month-over-month increase, while the 10-City and 20-City Composites both posted increases of 0.9% and 0.8%, respectively in December. After seasonal adjustment, the U.S. National Index posted a month-over-month increase of 1.3%, while the 10-City and 20-City Composites both posted increases of 1.2% and 1.3% respectively. Eighteen cities reported increases before seasonal adjustment, while all 19 cities reported increases after seasonal adjustment. “The trend of accelerating prices that began in June 2020 has now reached its seventh month and is also reflected in the 10- and 20-City Composites Home prices finished 2020 with double-digit gains,” said Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy with S&P. “The market’s strength continues to be broadly-based.” Source: CoreLogic

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