I think it’s pretty safe to say that 2020 was a year that none of us could have predicted. Goes to show the problem with predictions, reality gets in the way! After starting the year strong, the real estate market ground to a halt when the pandemic hit and it didn’t take long for some to speculate that we were in for a downturn comparable to 2008. Turns out the housing market didn’t crash and ended up having one of its best years in terms of number of homes sold and price appreciation. Will 2021 bring more of the same or are we likely to see some changes? While nobody knows for sure, I’ve been looking at the latest data and share what I’ve learned in this month’s real estate market update. Continue reading below, watch the following video, or do both to learn more.

Looking Back at 2020

When real estate ground to a halt at the onset of the pandemic there was speculation the housing was in trouble. I saw numerous videos and headlines about a housing market crash, assumptions that the spike in unemployment would cause a wave of foreclosures, and home price declines would follow. These were all knee-jerk reactions and speculation not actually based on fact. I don’t say that now through hindsight, but the first market report I published after the pandemic hit contained the following slide along with the point that a recession doesn’t automatically equal a housing crisis;

While the Great Recession of 2008 was the most recent, and unique in that it was caused by a collapse of the mortgage markets, and thus housing market, in 3 of the previous 5 recessions home prices had actually increased.

Having been in the real estate market through the last downturn I knew that the underlying conditions of the housing market in 2020 were nothing like the market in the lead up to 2008. Housing fundamentals were strong, home equity was increasing, and buyers actually had to qualify for a mortgage to get one. When the pandemic hit it felt more like a pause button had been pressed. What was unknown at the time was how long the market would be paused for and what the long term impact would be.

I don’t think anyone would have guessed the pandemic would end up causing real estate to have a record year in terms of home sales and price appreciation. Here is the latest update to the slide above;

In the 3 markets my team operates in the year-over-year price appreciation was well ahead of the national average:

Frisco, TX - Median home price up 18.1%

Prosper, TX - Median home price up 10.9%

Temecula, CA - Median home price up 17.9%

Home Equity Growth- The Real Story of 2020

While the pace of appreciation gets all the headlines, home equity growth is the real story and is one of the main reasons why the housing market now is nothing like it was in 2008. In 2008 there was very little equity. Homeowners had been using their homes like ATM machines and were saddled with mortgage debt. Today, homeowners are sitting on record equity which creates options and a safety net for those experiencing extreme economic hardship.

While nobody knows exactly what the future holds, the current widespread belief is that home equity will continue to grow for at least the next 5 years. The following graph from the Home Price Expectation Survey shows how much equity a homeowner could expect to gain over the next 5 years on a $300,000 home purchased today;

What Will 2021 Bring?

Much of what happens in 2021 will depend on the economy and the pandemic going forward. As the vaccine becomes more widespread the belief (and hope) is that we will start to get the upper hand on the virus so that a broader economic recovery will occur. There is little doubt that the service and hospitality industries have borne the brunt of the economic hardship as those industries cannot transition to a “virtual” environment. Nevertheless, the expectation is that unemployment will continue to fall over the next couple of years.

The economic distress and unemployment has disproportionately impacted those households more likely to be renters, while the shift in other employment sectors to working from home created an unforeseen demand for housing as people realized their current living situation wasn’t ideally suited to working, and possibly schooling, from home. While schools will transition back to in-person classes across the country it is becoming clear that working remote, in some form or fashion, is here to stay for the foreseeable future.

In addition to needing space to work in, a greater emphasis on having space at home to play in has also emerged with demand for larger backyards, pools, outdoor kitchens, and game rooms all increasing. This increase in demand for homes has continued to put pressure on supply which was already constrained and is unlikely to improve much before the second half of 2021.

What About Foreclosures

As mentioned above, the tremendous rise in home equity has created options for those homeowners experiencing difficulty. Over half of the mortgages that originally entered into mortgage forbearance when the recession began are now out of it. Of the remaining mortgages in forbearance, 18% are projected to be in danger of having foreclosure proceedings start. Though not all, many of these homes have enough equity to be sold and clear the outstanding mortgage obligation. This is an option that was not present in 2008. Will there still be foreclosures, yes, that is unfortunately inevitable, but will it be enough to negatively impact the overall real estate market? Not likely. If you’d like additional information on this topic I invite you to watch this video I recently did on Why We Will Not See a Wave of Foreclosures.

Mortgage Rates

We can’t forget about mortgage rates. Working from home is not the only contributing factor to a surge in home buyer demand. Record low mortgage rates have also had a major impact. Just when we thought rates couldn’t go lower, they did, and new all-time record lows have recently been experienced. However, since the election Treasury Bills have been rising while mortgage rates have continued to fall. This is important because it’s not supposed to work that way. When treasuries rise mortgage rates are supposed to follow suit. So why haven’t they? One of the stimulus measures the government took was to be a very active player in the secondary mortgage market. The government has been buying vast amounts of mortgage-backed securities which have kept mortgage rates artificially low. As the economy continues to improve the government will pull back on this form of stimulus causing mortgage rates to rise. The consensus is that rates will probably reach 3% to 3.2% by the end of the year. While not as good as today’s mortgage rates, still phenomenal by historical standards.

Additional Questions?

If you have been contemplating making a move this year and have additional questions about the market please feel free to Schedule a Call with me, There is no cost or obligation and I’d be happy to discuss your specific situation in more detail.