For most Americans, it has been a challenging twelve months to say the least. Perhaps one of the biggest economic surprises coming out of the COVID19 crisis has been the red-hot demand in the residential real estate market. Even in the face of the highest unemployment rate since the Great Depression, the housing market has not only survived, it has thrived.
There are several reasons for this. As a result of the housing crisis of 2008/09, construction companies serving the residential housing market significantly cut back their activities in new home construction. The housing market is still feeling the effects of this diminished construction activity. Over that same period of time, millennials were beginning to engage the home ownership market in ever greater numbers. In other words, the formation of new households was taking off, at the same time in which new home construction was at an historically low level. The movement away from larger cities to smaller suburban locales was well underway before the pandemic hit. Families were increasingly seeking larger homes and more living space. The COVID19 crisis turbo-charged this trend. Many families found themselves in desperate need for more space. It is expected that many work and school activities will revert to their pre-pandemic norms. However, most experts believe that remote work and in-home schooling arrangements will continue to be more popular even after the effects of the pandemic recede.
These forces have combined to create one of the largest supply/demand housing shortfalls in recent history. There are simply not enough homes on the market to satisfy current demand. Therefore, even in the face of a global pandemic and subsequent economic crisis, the demand for housing has remained at elevated levels. In many geographies, the price of housing has continued to climb, even accelerating during the crisis. However, soaring home prices may be helping to alleviate some aspects of the current housing shortage. As recently detailed by the Wall Street Journal, a great many homeowners have recently tapped into the equity in their home: “U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac.”
The rising level of home prices have given many homeowners the opportunity to access cash for home improvements, which often include adding additional square footage. “Some borrowers viewed cash-out refis as a way to cushion themselves against an uncertain economy last year. Others wanted to build and redecorate. Though home prices tend to fall during economic downturns, they jumped during the Covid-19 recession.”
At Aloha, we are also continuing to see strong demand from the Fix and Flip market. The supply constraint of housing has not been limited to new construction homes. Families are staying in their homes longer, thus constricting the supply of existing homes as well. As families continue to move into suburban locales and others remain longer in their homes, much of the available housing stock must be updated. Many of these homes were built in the 1970’s and 1980’s and are in dire need of updating to modern standards. The increased levels of refinancing and cash-outs now being experienced by mortgage
companies have a parallel in our portfolio. Many real estate development professionals require our lending services to refurbish existing homes to help feed the heightened demand from new home buyers entering the market.
In the first quarter of 2021, the US Ten Year Treasury rate has risen, increasing the rates on home mortgages along with it. Heading into the middle of 2021, it will be interesting to see if the recent increase in rates will have a detrimental effect on home prices and refinancings. As stated in the Wall Street Journal, “Low rates – the average rate on a 30-year fixed mortgage fell below 3% for the first time last year – also made cash-out refis appealing. They could become less popular if mortgage rates continue to rise, as they have in recent weeks.” The shortage in new home construction, along with the changed consumer home-buying behavior make for two very strong trends. It would most likely take a significant increase in mortgage rates to reverse these trends. Only time will tell.
Steve Sapourn is co-founder and portfolio manager at Aloha Capital. He specializes in designing low-risk portfolios that reliably out-perform benchmarks. Steve has managed alternative investments in a variety of asset classes for nearly 25 years. His accomplishments include creating and implementing quantitative trading strategies in the futures, stock, and volatility markets. He’s also served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies.