Normally, as we move from summer into fall we start to see the real estate market cool. This is the normal seasonality of the market as we enter the 4th quarter and start preparing for winter. This year, due to the pandemic, the spring market shifted to the summer and the summer market seems to have shifted to the fall and there are currently no signs of a slowdown.

In this months real estate market update I’m going to take a look at the latest real estate market activity, share the key metrics, discuss the potential impact of the latest unemployment numbers and provide some insight into where the real estate market is likely heading over the next year.

Continue reading below or just press play to have me break it all down for you.

While there has been plenty of speculation over what type of economic recovery the overall economy would experience - V-shaped, W-shaped, a swoosh etc., there is no denying the real estate market has been experiencing a strong V-shaped recovery. As Mark Fleming, Chief Economist at First American notes;

“Housing has experienced a strong V-shaped recovery and is now exceeding pre-pandemic levels.”

Even though the real estate market started 2020 strong out of the gates, I don’t think anyone would have imagined the housing market bouncing back from the effects of the initial lockdown so quickly. This V-shaped housing recovery is best demonstrated by the Housing Market Recovery Index. This index is comprised of 4 components- Demand, Supply, Price, and Time on Market. February 1st is considered the baseline which equals 100 on this graph.

Key Metrics

When looking at the overall health of the housing market the key metrics that are often tracked are the number of showings taking place, the number of new mortgage applications being made, number of pending sales, existing home sales, new home sales, and year-over-year change in total available inventory. The following graph shows the year-over-year changes of all of these key metrics.

As you can see, all of the key buyer/seller metrics are up while total available inventory, for both new and existing homes, is down substantially from year-ago levels.

Can We Keep This Up?

That depends! While the housing market has shown incredible resilience, how long this will continue greatly depends on the overall economy. So far, the economy has been recovering faster and better than originally thought possible. Although there have been signs the pace of recovery is slowing, it continues to improve month over month. Consumer spending is one of the metrics that is tracked to gauge overall economic health. Currently, consumer spending is also following a V-shaped recovery as shown on the following graph:

Not all states are fairing equally as much depends on the severity of the lockdown restrictions. It would make sense that the states that have opened sooner are faring better than the ones that have stayed shutdown longer in terms of recovering consumer spending. This map clearly shows the differences;

Unemployment

Unemployment is another factor that not only impacts the overall economy, but directly impacts the real estate market. The impact to the real estate market is two-fold. First, if you are unemployed you obviously won’t qualify for a loan and therefore can’t buy a house. Second, if current homeowners become unemployed we could see an increase in the number of delinquent mortgages.

The good news is that the unemployment rate continues to fall and currently stands at 7.9%. I’m not suggesting that 7.9% is a good number, but it’s substantially better than the 14.7% we saw in April. Although the pace of job gains has slowed, the unemployment rate does continue to fall month-over-month.

Likewise, as the unemployment number has fallen we have seen the number of mortgages in active forbearance also fall. This is a very positive sign after we saw the number remain stagnant through mid-August.

Although the number of mortgage forbearances continues to fall and the unemployment rate is coming down I continue to see a lot of speculation about the potential of a wave of new foreclosures and another housing market crash.

First and foremost it’s important to remember that foreclosures are always part of the housing market. Even though the housing market has been strong for most of the last decade there have been foreclosures every year. I have been saying since the beginning of this crisis that the market conditions now are very different than they were in 2007, 2009, 2009, and because of this, it was unlikely that another housing “crash” was on the horizon. Bill McBride of Calculated Risk has this to say about a potential housing crisis;

“This is very different from the increase in delinquencies following the housing bubble. Lending standards have been fairly solid over the last decade, and most of these homeowners have equity in their homes - and they will be able to restructure their loans once (if) they are employed.”

During the housing market crash years we didn’t have a shortage of homes for sale as we do now.

The plunge in home prices we saw when the bubble burst was due to a correction. In many markets, home prices were increasing even with plenty of supply. For the past 8 years, we have been dealing with low supply and high demand, which has pushed home prices up. That appreciation has caused homeowner equity to grow, which creates the options Bill mentioned above.

Home Prices Going Forward

As shown above, for the past 8 years we have been in a sellers market due to high demand and low supply. That situation is not expected to change any time soon.

Even though new listings are coming on the market, the pace of new listings has not enough to satisfy demand so the total number of listings available continues to fall.

New home builder confidence has reached its highest level in years as new home sales this year are breaking records.

As you can see above, new home sales are up 43% year-over-year compared to being up 10.5% for existing homes. As a result it should be no surprise that home appreciation estimates for the next 12 months continue to be revised upwards.

Bottom Line

The biggest obstacle to the housing market currently is the lack of new inventory. That could change if the overall economic recovery stumbles, but based on everything known currently the real estate market should remain strong for the foreseeable future.

Currently, record low-interest rates are working to offset price appreciation and interest rates are not expected to climb much in the months ahead, but if they do we will have to take a look at how affordability is being impacted.

If you, or anyone you know, has been considering selling current market conditions could make this an ideal time.

If you’d like more specific information on the latest trends in your neighborhood, please reach out and I’d be happy to provide those for you.