Matthew Gardner's latest video on the housing market is full of important information regarding inventory, mortgage rates, future predictions, and new home builds. There continues to be an extremely limited amount of inventory, but Gardner is still expecting that the number of home sales will increase by more than 11% compared to last year. With such a significant upswing in home prices, over 30% of homeowners currently have more than 50% equity in there homes!
Diving into mortgage rates, it is clear that the rates began to jump in early February and it is pretty unlikely that they are going to go back down anytime soon. The spike is due to the widely distributed COVID-19 vaccine and as the country begins to open up more we will see a significant boost in economic activity. With so many receiving the vaccine, it is expected to see a boost in economic growth in the second half of the year and the potential for inflation to rise is now elevated, which has caused one thing- a move out of bonds. Specifically, 10 year treasuries, which means that interest rates for these bonds have to rise to attract more buyers and the interest rate on 10 year paper directly impacts mortgage rates.
Although, rates still remain remarkably low! The prediction for rates this year are expected to rise to an average of 3.6% by the fourth quarter of 2021. It won't be until early 2022 that rates may creep back into the 4% range. Gardner mentions that inflation will level off after a short period of time and not get out of control. Although, if we do see an ongoing spike in inflation there is the potential for mortgage rates to rise faster than he is currently anticipating.
Moving on to new homes, home starts are down by 8.5% and single family permits are down by 10%. Builders are slowing down production due to lumber and material costs continuing to increase. Future construction is also at risk due to the limited amount of materials available, including appliances! Many projects have been put on pause due to cost, as lumber prices have increased by more than 180% since last spring. The price spike has caused the price of an average new single family home to increase by more than $24,000. On a positive note, the Futures price has been dropping and that may mean we are getting closer to the end of the massive increases in lumber prices.
Lastly, the National Association of Home Builders put out an analysis which suggests that the recent rise in mortgage rates over the past couple of months has priced over 1.3 million households out of the market for a median priced new home. Affordability is becoming even more of a major concern, as almost 58% of all households in the country cannot afford a median priced new home.
With all that being said, the bottom line is we need home price growth to slow and we need more inventory!
Matthew begins with information on the current home ownership rates and dives into the data regarding home buying and the younger generation. The ownership rate for millennials is increasing and the current rate of 38.5% is a share not seen since back in 2011. Gardner believes this number will continue to rise over the next several years. He also wouldn't be surprised to see the younger generation shifting into home ownership in even faster rates due to the ability to work from home, allowing them to move out of expensive cities and move into more affordable markets where they can buy.
Younger buyers continue to account for a major share of total mortgage borrowing. In 2020, millennials and Gen Z borrowed over 1.3 trillion dollars to buy homes. That is over 35% of total new mortgage debt on a dollar basis!
Looking into ownership rate by ethnicity, the report below showed that the share of white households ticked up, but the ownership for black households, while it went up a little, is still well below where it should be. Gardner states that this is a long term, systemic issue that needs to be addressed. The ownership rate for black families in 2020, was 25% lower than for white families. Gardner is concerned and sincerely hopes overtime this discrepancy will be addressed.
Regarding the latest data on permits and starts, permits continue to grow significantly. Single family permits increased by 3.8% month over month and continue to come in 30% higher than we saw a year ago. There is a weakness in starts due to some very worried builders about increasing lumber and other construction material supply costs. Although, the number of homes under construction still continue to trend higher.
Looking into supply, the total inventory of homes is down 25.7% which is a new record low. Only 1.04 million homes are for sale, with only 1.9 months of supply. Even with this record low of inventory, the number of sales remain impressive.
Sales are up by 23.7% compared to a year ago, and there would have been even more sales if there was more inventory. Seventy one percent of homes are selling within the space of a month, and on average within 21 days.
The median sale price of homes is up 14.1% year over year. Homes for sale priced under $100,000 were down by 28% year over year and homes in the $500-750 range increased by 53% year over year. Sales of a million dollar plus homes were up 76.7% than a year ago and they accounted for 11% of all sales. Gardner says we should still expect to see home sales rise as more of the country opens up and the vaccine is more broadly distributed.
Matthew came out with his first video for 2021 and it's full of great information! If you don't have time to watch the full video we have provided some highlights below.
Starting with The National Association of Home Builders report we can see that the index has slipped from 86 to 83, but builder's still see the market conditions as favorable opposed to poor since anything above 50 is positive.
It is not surprising that builder confidence has trended lower over the past two months, between surging COVID-19 infections and increasing material costs. Lumber prices are up by 52% compared to a year ago! Builders are dealing with a lack of affordable lots to build on, material supply, and labor shortages. This is creating an upward pressure on new home prices, which slows demand as prices increase.
Regarding permits and starts, activity has not slowed. The number of single-family permits issued rose by 7.8% between November and December with an annual rate of 1.226 million units which is 30.4% higher that what we saw a year ago and it is the fastest rate we’ve seen since 2007.
Housing starts are 27.8% higher and have increased now for 8 continuous months. Starts refer to a lot with a foundation that has been poured. The current level of ground up construction is at its highest level since 2007. These numbers should continue to rise and these new homes should take some upward price pressure off the resale housing market.
Looking at the resale housing market and inventory, we are currently at 1.9 months of supply of inventory which is the lowest number of homes for sale on record. We haven't seen this level of low since 1982.
The total number of homes that sold in 2020 was the highest level we had seen since 2006. No one could have predicted how COVID-19 would effect buyers and the housing market.
Overall, low supply and strong demand continue to increase home prices. Mortgage rates have dropped a full percentage rate lower than they were a year ago and home sales have stayed strong, even on the higher priced end of the market, which is keeping housing prices high.
In 2020 sales of single family homes rose by 6.3% and only rose by .05% in 2019. Prices were on the rise increasing by 9.2% last year which we haven’t seen since 2013.
This past year mortgage rates have broken record lows, and we have watched them drop week after week. Matthew Gardner predicts that rates will most likely bottom out in the current quarter but he doesn't see mortgage rates increasing significantly next year.
Regarding existing home sales, Matthew Gardner forecasts that sales should be up by 6.9% in 2021, which is a level we haven't seen since 2006. For sales to rise by this extent we need more inventory, and sales will most likely increase due to COVID-19, whether that is because homes are not set up for remote work or people do not need to live in their current location.
In 2020, sale prices were 7.4% higher than in 2019. Matthew's 2020 forecast was 4% price growth rather than 7%, but COVID-19 changed all that. Mortgage rates dropped, people decided to moved for various reasons, and there was very limited inventory.
Gardner forecasts that prices will rise by 4.1% in 2021, but they will rise at a slower pace because there is a correlation between home prices and income. Mortgage rates dropping can only allow prices to rise so much and he also believes affordability issues will cause prices to rise at a more modest percent.
The number of active forbearances are down by 8% (roughly 246,000 homes) from just the end of October, and the number of homeowners in forbearance is down from almost 2 million from the peak we saw back in May.
While many believe the housing market is going to crash due to the amount of homeowners in forbearance leading homes to be foreclosed on and a large amount of inventory coming onto the market, creating home prices to drop, Gardner has a different theory.
He believes foreclosures will rise next year, but he does not think there will be an overflow of homes coming on the market and he predicts the number of foreclosures will be mild compared to what he saw in 2008-2010. Here's why, looking back to March 2020, homeowners were in a very good place. Credit standards were tight, down payments were significant, and the economy as a whole was very healthy. Homeowners have built up equity, there is strong demand if people needed to sell, and lenders want to do a better job at keeping people in their home, by allowing missed payments to be added on little by little each month to their bill or allowing homeowners to extend their loan term.
Existing home sales rose for the 5th consecutive month, and sales are 26.6% higher compared to a year ago.
As sales rose in October, so did prices. The median home price in October was up by 15.5% compared to a year ago, and we haven't seen that pace of price growth since 2006. Mortgage rates being at an all time low are certainly affecting prices, but the low supply of inventory and high demand for homes is the largest factor contributing to this price growth.
There is an all time low for inventory available, and we are a long way from a balanced market.
A balanced market is somewhere between 4 to 6 months of inventory, and we are currently averaging around 2 months.
There was an average of almost 3 and a half offers on every transaction that was written last month. There were 7 out of 10 homes that sold within 4 weeks within coming online and the median market time was 21 days, a year ago it was 36 days.
Matthew reinforces his viewpoint that this pace in price growth is absolutely not sustainable. He also believes that while there are very favorable mortgage rates right now, he states that we are rather close to the lowest rates we are going to see in this cycle.
With this type of market Gardner states that something has to happen, and this pace in price growth has to slow down. He believes that we are either going to hit an affordability ceiling or we will see additional supply coming online this next year.
Michael Hyman is the National Association of Realtor's Research Data Specialist. Below is his most recent article from November 13, 2020, discussing the housing affordability index, median family income, and mortgage rates.
"At the national level, housing affordability declined in September 2020 compared to a year ago but rose compared to August, according to NAR’s Housing Affordability Index. Affordability increased in September compared to August as the median family income rose by 2.3% while the median home prices rose by 15.2%. The effective 30-year fixed mortgage rate fell to 2.95% this September from 3.00% in August. Mortgage rates are at all time lows compared to a year ago at 3.65%.
As of September 2020, the national and regional indices were all above 100, meaning that a family with the median income had more than the income required to afford a median-priced home. The income required to afford a mortgage, or the qualifying income, is the income needed so that mortgage payments make up no more than 25% of family income. The most affordable region was the Midwest, with an index value of 201.9 (median family income of $79,775 which is twice the qualifying income of $39,504). The least affordable region remained the West, where the index was 112.9 (median family income of $86,968 and the qualifying income of $77,040). For comparison, the index was 170.3 in the South (median family income of $74,859 and the qualifying income of $43,968) and 159.9 in the Northeast (median family income of $92,844 with a qualifying income of $58,080).
Housing affordability declined from a year ago in all regions. The South had a decline of 1.0% followed by the Midwest with a dip of 2.9%. The West had a drop of 1.0% followed by the Northeast with the biggest decrease in affordability at 6.3%.
Affordability is down in two of the four regions from last month. The South had a gain of 1.8% followed by the Midwest with an incline of 2.3%. The Northeast had a decline of 1.1% followed by the West with a dip of 2.3%.
Nationally, mortgage rates were down 70 basis points from one year ago (one percentage point equals 100 basis points). The median sales price for a single-family home sold in September in the US was $316,200 up 15.2% from a year ago, while median family incomes rose 2.3 % in 2020 from one year ago.
Even with lower mortgage rates compared to one year ago, the payment as a percentage of income rose to 15.7% this September from 15.2% from a year ago. Regionally, the West has the highest mortgage payment to income share at 22.1 % of income. The Northeast had the second highest share at 15.6% followed by the South with their share at 14.7%. The Midwest had the lowest mortgage payment as a percentage of income at 12.4%. Mortgage payments are not burdensome if they are no more than 25% of income.
This week the Mortgage Bankers Association reported mortgage applications decreased 0.5 from one week prior. Mortgage rates have continued to decline and are at a historic low. Demand for housing is still high with a lot of sellers sifting through multiple offers on their home. Low inventory levels remain an issue for first-time buyers and potential home owners."
Jobs continue to return, but the pace has slowed significantly. The country added 638,000 jobs in October, which was surprisingly strong due to the current rate of COVID-19 cases.
It's good to see the unemployment rate drop, but the amount of people who have been unemployed for more than six months has increased by 1.2 million.
While the number of temporary laid off workers is dropping, the amount of temporary laid off workers still still came in at 2.3 million. That is down from 18 million back in April and while it's better it is still at an elevated number.
The number of permanent lay offs continue to rise, which leads economists to still believe that a full recovery in jobs is still a long ways away.
At the end of Matthew Gardner's video he states that the housing market continues to outperform, but the pace of price growth is not sustainable and while it has to start tapering off at some point it isn't quite there yet. Check out the graphs below or watch his video to see what was going on with the real estate market in September 2020.
The theme of the video below shows an incredibly hot market that has the potential to turn, because prices have skyrocketed and homes are becoming unaffordable. Another resource for you to look at is the housing affordability index. We get these numbers from the National Association of Realtors, and will continue to update them as they come in.
Matthew Gardner talks about the tight supply of housing and how it is affecting home prices. The median sale price in September was $311,800, which is up by 14.8% compared to a year ago. This is the fastest pace of growth since data started to be collected all the way back in 1968!!
Looking at single family homes annual sales came in at almost 5.9 million, which is up 21.8% and also up 9.7% compared to august of this year. Housing supply is limited with only 1.2 million homes for sale and the months of supply is 2.5 which is another record low. Prices are reflecting massive demand and limited supply with the median sale price being $316,200 which is up 15.2% compared to a year ago. We haven't seen this pace of of price growth since 2005.
Single family building permits rose by 7.8% to annual rate of 1.12 million units a number we haven't seen since 2007. The number of developments that have yet to break ground has risen to a value that we haven't seen since 2018. Hopefully this means more supply down the road. Material, land, and labor, costs are all very high making it difficult for builders to bring homes to market that buyer's can afford.
What the below means in layman's terms, is the low interest rates have fueled the housing market. This is causing home values to go up faster than mortgage rates are dropping. As a result we could find many buyers getting priced out of the market. When buyers exit a sellers market, supply and demand is affected. Sometimes this is where you will see a shift in the market. The higher the number in the housing affordability index indicates more affordability. The index is now on the decline and when it reaches 100 is when the median income qualifies for the median priced home.
Looking back to 2006 the affordability rate was 108 representing it was the most expensive time to buy a home since 1990. In 2008, the market had shifted significantly downwards and the index increased to 138 indicating the most affordable time to buy a house ever.
Shifting into April 2020, the index was at 171.7 reaching a new high in affordability. In October 2020, the National Association of Realtors published the chart below where we see a decline in the index down to 158.9 in August.
If the index continues to drop we will likely see a shift in the market from a sellers market to a buyer's market, if the index approaches 100.
Remember when it goes below 100 the average family cannot afford the average home.
If you would like to discuss how this might affect you please feel free to contact me at (253) 732 - 2500.
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