The residential real-estate market is on its biggest tear since 2006, just before the housing bubble burst and set off a global recession. Yet in nearly every meaningful way, today’s market is the inverse of the previous boom.
Anthony Lamacchia, a broker and owner of a real-estate company near Boston, entered the industry in 2004. Home buyers were trading up to bigger, more expensive houses after barely a year, he said. Many buyers paid small down payments, or none at all. When housing prices stopped rising, the market collapsed. By 2009, Mr. Lamacchia was working with clients desperate to dump the homes he had just helped them buy.
Now, he said, housing demand in the Boston suburbs is stronger than he has ever seen. Lamacchia Realty reached $1 billion in sales last year for the first time. Buyers have higher credit ratings these days. They are flusher and are putting down more cash up front.
“On $1 million purchases, people are putting down $500,000,” he said. “You didn’t see that before.”
In the mid-2000s, loose mortgage-lending standards enabled borrowers with poor credit histories to purchase homes beyond their means, sometimes with mortgages that required low payments in the early years of the loan. Too much new construction led to an oversupply of houses. Financial firms packaged these risky mortgages as securities and sold them to investors. When more homeowners started defaulting on their mortgages, lenders suffered large losses and the entire financial system froze up.
Many homeowners paid a big price. Between 2006 and 2014, about 9.3 million households went through foreclosure, gave up their home to a lender or sold in a distressed sale, according to a 2015 estimate from the National Association of Realtors.
The current housing boom is far more stable than the last one and poses fewer systemic risks, economists say. A downside: There are more barriers to entry, and it’s more difficult for buyers who aren’t already homeowners to make that first purchase.Most real-estate analysts agree that the pandemic helped ignite the current boom as some urbanites looked to leave crowded cities like New York and San Francisco for cheaper cities or for more space in the suburbs while working from home. When lockdowns began lifting last year, home sales took off: June sales surged nearly 21% over the prior month, the biggest monthly increase on record going back to 1968. That milestone lasted only a month, when July sales rose almost 25% from June.
“Covid has catalyzed a rethinking of where we live, and why we live there, and where we work, and how we work,” said Rich Barton, chief executive of online real-estate company Zillow Group Inc.
Market watchers also say that a number of longer-term trends are at play that should keep the housing market hot, or at least steady, even after Covid-19-related demand fades.
Millennials, the largest living adult generation, continue to age into their prime homebuying years and plunk down savings for homes. At the same time, the market is critically undersupplied. New-home construction hasn’t kept up with household demand, and homeowners are holding on to their houses longer. Buyers are competing fiercely for a limited number of homes.
Mortgage lenders, meanwhile, are maintaining tight standards—buyers are drawn to the market by historically low interest rates, not by easy access to credit. Rising home values also mean that even if homeowners can’t afford their mortgage payments, they can likely sell their homes for a profit rather than face foreclosure. Financial firms are still packaging mortgages as securities, but the vast majority of those mortgages today have government backing.
The biggest winners in today’s boom are people who already own homes, who gained a collective $1.5 trillion in equity in 2020 from a year earlier, according to CoreLogic. They have also saved money by refinancing their mortgages at record low rates. Many have started renovation projects or bought vacation homes.
Real-estate brokers, home builders and mortgage lenders are also riding the wave. The S&P Homebuilders Select Industry index is up 96% over the past year, outpacing the S&P 500’s 59% gain. Between July and December, eight of the 30 largest U.S. mortgage lenders announced plans to go public.
Those trying to break into the market for the first time have rarely found it more difficult. U.S. house prices soared 10.8% in the fourth quarter from a year earlier on a seasonally adjusted basis, the biggest annual increase in data going back to 1992, according to the Federal Housing Finance Agency. The median home purchase price climbed above $300,000 last year for the first time. Nearly one in four home buyers between April and June bought houses priced at $500,000 or more.
Less-expensive homes became harder to find. Sales of homes priced at $250,000 and below declined in 2020 from a year earlier, according to NAR.
First-time home buyers are struggling to afford down payments. For many renters who lost jobs in 2020, homeownership is even further out of reach.
“Housing has become a luxury good,” said Glenn Kelman, chief executive of real-estate brokerage Redfin Corp. “The economy seems to have officially split in two. There is so much hardship in one part, and then there’s just an absolute mad dash to buy houses in the other part.” The homeownership rate stood at 65.8% in the fourth quarter of 2020, up from 63.7% in the fourth quarter of 2016, according to the U.S. Census Bureau.
The housing market’s biggest near-term concern is rising mortgage interest rates, which recently hit their highest level since July and cooled the market slightly. With bond yields rising as investors anticipate a post-Covid rebound, many economists expect mortgage rates to continue creeping upward this year.
Federal Reserve Chairman Jerome Powell said this month that the central bank will maintain ultralow interest rates until its employment and inflation goals have been met, which he said were “still a long way” away.
Some of the home sales in the past year were likely sales that would have happened in the next few years but were accelerated due to Covid-19, real-estate agents say. That could augur a slight slowdown in demand going forward. Some people who are currently working from home are also likely waiting for their companies to decide on future remote-work policies. They might opt to stay put if they are required to commute to the office daily in the future.
Economists also caution that the shortage of homes on the market could limit the number of sales this year. Spring is typically the busiest season for home sales, as families aim to move before the start of a new school year.
The housing markets in New York City and San Francisco, two of the country’s priciest areas, slumped last year as some residents moved away and the pace of people moving into those cities slowed. New York City home prices in January fell 3.1% from a year earlier, according to listings website StreetEasy’s price index. In San Francisco, the median sale price in January declined 1.9% from a year earlier, according to Redfin.
For now, the pandemic looks likely to keep housing demand strong. In Sacramento, Calif., an influx of buyers from the San Francisco Bay Area helped push up the median sales price 21.3% in January from a year earlier, according to the California Association of Realtors.
Article Source: Mansion Global