2020 was a surprisingly strong year for housing. If underlying dynamics continue as we anticipate, 2021 is likely to be even stronger. Home sales and price growth quickly re-accelerated after a brief pause in the spring, and housing became a silver lining in what has otherwise been a tumultuous year for the economy.
As has been the case for several years, the U.S. housing market continues to feature limited supply and strong demand. Inventories remain tight. This coincides with increasing demand as Millennials move into their peak home buying years. Mortgage rates remain near 50-year lows, and there’s no sign yet of distressed sellers from the recession coming out. We expect these factors to push prices even higher in the first half of the year.
In fact, Zillow foresees a perfect storm of market conditions this spring that will “create the hottest spring shopping season in recent memory, with sales happening quickly and often above list price.” Covid-19-related lockdowns are expected to wind down and economic activity accelerate. Zillow predicts that “although dense, urban living got a bad rap” last year because of the pandemic, “city living will almost certainly enjoy a renaissance in 2021.”
The newly inaugurated Biden Administration has expressed its desire to improve housing affordability– especially for first-time buyers.
Biden is proposing a $15,000 first-time homebuyer tax credit, which could be accessed immediately by the buyer, thereby serving as down payment assistance.
Real estate construction – recently hampered by labor shortages and soaring material costs — could get some relief from the new administration. Recent restrictive immigration policies likely exacerbated an already severe labor shortage for builders, as many documented and undocumented construction workers left the industry. Biden’s more open policies might help with the labor shortages. And Trump’s trade wars made materials from lumber to concrete to metal more expensive. The easing of the tariffs could help reduce material costs.
Biden is also likely to push for increased lending by the FHA, which is a low down-payment loan option heavily favored by first-time buyers. The FHA could reduce its monthly insurance premiums under the new leadership. Big banks exited FHA lending almost entirely after the Great Recession because of enforcement actions against them for how they managed the program.
The new administration can’t change interest rate policy. However, thanks to a dovish Fed, interest rates remain near historical lows. The Federal Reserve has been buying mortgage-backed bonds, which has helped keep rates artificially low. No one expects the Fed to change its easy money policy any time soon.
We always pay close attention to home fix-and-flip trends. While home-flipping rate dropped in the third quarter, both profits and profit margins increased. According to ATTOM Data Solutions, the gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the third quarter of 2020 to $73,766 – the highest amount since at least 2000. That amount was up from $69,000 in the second quarter of 2020 and from $61,800 in the third quarter of last year.
According to Todd Teta, chief product officer at ATTOM, “Home-flipping again generated higher profits on less transactions across the United States in the third quarter of 2020 as investors continued to make more money on a declining number of deals. This all happened in the context of the pandemic, which has created unusual circumstances for the housing market to thrive, and that has included the home-flipping business. Too much is uncertain these days to say whether the latest trends will continue. But for now, the prospects continue looking up for home flipping after a period when they were trending the opposite way.”
Indeed, the wild card in our optimistic scenario for 2021 is the Covid-19 pandemic. The vaccine rollout has been rocky. And variant strains of the virus threaten to extend quarantines. Ongoing lockdowns could put a dent in housing inventory and sales, slowing the market and putting increased pressure on buyers. Conversely, if the vaccine rollout accelerates smoothly, it could lead to better than expected sales and a strong increase for home prices and inventory. Either way, COVID-19 will have an impact on the U.S. housing market in 2021.
But if we’ve learned anything from 2020, the U.S. housing market is very resilient. Whatever happens going forward, the American dream of owning one’s own home is likely to endure.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.