Temperatures aren’t the only thing heating up this month as the local (and national) real estate market is scorching. A combination of low inventory, affordable mortgages and strong demand is fueling record home price appreciation and buyers are struggling to find homes. We will dive deeper into what is happening in the real estate market below, but first, let’s check out the headlines.
Headlines
- March Jobs Report - The March jobs report shows signs of a labor market in full recovery as the U.S. economy added a whopping 916,000 jobs and the unemployment rate fell to 6%. The total of new jobs added nearly doubled the numbers from February (+468,000) and represent the largest increase since last August. Economists believe this report suggests we may finally be on track to recovering the jobs lost to the Pandemic, but even at this pace, it could take a year or more to recover all of the jobs we lost.
- Jobless Claims - 744,000 American workers filed for first time unemployment claims, reversing the recent downward trend. This is not the news we were looking for following a stellar March jobs report, but it’s not exactly unexpected and claim numbers can fluctuate as the recovery takes hold. Locally, new claims jumped over 20% for the second straight week, but continuing claims have now fallen for 9 consecutive weeks.
- Eviction Moratorium Extended - Another day, another extension of the eviction moratorium - this time until June 30, 2021. Beyond just an extension of the date, some minor restrictions were added involving certain types of criminal activity (namely trespass), protections were allowed for tenants with an active COVID-19 infection or recent exposure and minor updates were made regarding the acceptable types of paperwork required. All in all, it doesn’t change much but let’s all hope this is the last extension.
What is going on with U.S. Real Estate Values?
In case you haven’t heard, the U.S. housing market is not exactly “normal” at the moment. In fact, we are smashing records all over the country in terms of home values, inventory levels and buyer demand. We wanted to take a deeper dive into what is happening, the likely causes and what we may see down the road as a result.
What is happening with home values?
We could probably devote 10,000 words to everything going on in the U.S. real estate market right now, but sometimes it’s easier to convey information with just a few numbers. According to real estate site Redfin:
- 59% of homes on the market are under contract within two weeks
- Active listings are down 42% from this time a year ago
- Home prices are up 17% in the last year to a record level of $353,500
At its most basic level, the demand for housing far exceeds the available supply, but what is driving this thirst for housing? There are a number of factors playing into this phenomenon (which we will discuss below), but the end result is upward pressure on pricing.
Why are home values climbing?
There isn’t any one factor that’s driving the hot housing market, but rather it’s a combination of variables at play on both the supply and demand side of the equation.
Beginning with housing supply, the nation’s homebuilders learned a hard lesson about overbuilding during the subprime crisis of 2007/2008 when a massive oversupply of new homes contributed to tanking home values. In response, much of the industry has been underbuilding ever since, which has created the opposite problem where demand for housing far exceeds the supply of new homes available.
There are also a number of other factors contributing to an increase in demand for housing. For starters, interest rates remain low (thanks to the Fed's bond buying program) which makes borrowing more affordable. Also, many markets (including Utah) have seen an increase in net migration, meaning more people are coming into the state than are leaving, which is contributing to a shortage of homes. Additionally, home buying among millennials is accelerating. Many millennials watched their parents lose homes during the financial crisis and preferred to rent while establishing their careers and paying down student loans. As these buyers transition from renting to buying, it will have a significant impact on housing demand. Finally, normal buyers are seeing increased competition from institutional investors as single family rentals have shown themselves to be a profitable alternative to multi family assets.
What are the potential risk factors and when might things change?
Will prices continue to climb for the next decade? Will we see another bubble in the housing market? We do not possess a crystal ball and no one knows for sure, so let’s focus on what we do know.
First, the surge in home values is creating a huge increase in homeowner equity. According to real estate information company CoreLogic, home equity surged 16.2% in the past year to a combined $1.5 trillion for homes with a mortgage. That is a lot of money in the pockets of homeowners. Furthermore, another benefit of rising home values is a reduction in the number of underwater mortgages. At the end of 2020, the number of underwater U.S. mortgages fell 21% from the same period the previous year. While true, both points require context as there are risk factors.
In the last year alone, Americans accessed $152.7 billion of home equity via a cash out refinance and another $74.9 billion from home equity lines of credit or HELOCs. Those numbers represent a 41.7% increase in cash out refinances and almost double the HELOC volume from 2019, and it seems likely that at least some portion of those borrowers accessed their home equity to help them through the pandemic. Additionally, we must remember that as of January 2021, nearly 2.7 million borrowers remain in mortgage forbearance programs and 2.1 million of those borrowers are also 90 days behind on their payments. This is potentially problematic when you consider that estimates predict 1.7 million borrowers will begin to exit these programs starting in September. We are only left to guess if a wave of foreclosures will follow.
We also know that these kinds of increases are unsustainable over the long term because both incomes and rental rates aren’t keeping up with home prices. However, the current market fundamentals are very different than they were in the real estate craze preceding the Great Recession where demand was artificially inflated due to low lending standards. This housing shortage is real, and until either demand dries up (interest rates climb, out of market buyers disappear) or supply increases (homebuilding catches up or inventory increases due to foreclosures), we can likely expect to see more of the same.
Utah Real Estate Market
You may have heard this somewhere else, but the Utah real estate market is crazy right now. How crazy you ask? Check out this KUTV article highlighting recent buyer experiences. In summary, unless you are prepared to submit offers well above the seller’s asking price without even seeing the property, then you might consider sitting out this market. With that said, it’s a great time to own real estate. Just look at the change in median sold price since January...
Median Sold Price
January: $438,725
February: $455,000
March: $482,161
% Change: Up 5.9%
Sold Count
January: 1,170
February: 1,349
March: 1,726
% Change: Up 27.9%
Average Number of Active Listings
January: 1,003
February: 987
March: 1,004
% Change: Up 1.7%
Industry Updates
- Texas/Ohio Courts Invalidate CDC Eviction Order - A new court ruling in Ohio is causing landlords to breathe a sigh of relief. District Court Judge J. Philip Calabrese of Ohio’s Northern District ruled that the CDC’s eviction order is unlawful and exceeds the agency's statutory authority. This comes on the heels of a similar ruling by Texas District Court Judge J. Campbell Barker this past February where he ruled the order to be unconstitutional.
- Changing Renter Priorities - Not surprisingly, it looks like living through a pandemic has caused renters to reevaluate what they look for in a rental. A recent survey from RentCafe with over 10,000 responses showed that lifestyle improvement was the main motivator for those looking to rent now. The top in demand features for apartment dwellers were “open air amenities” (21%) and “more space” (20%).
