April is typically the month that the real estate market really starts to heat up and get active. The beginning of the spring selling season. With that in mind, it’s hard to imagine the real estate market getting any hotter than it has been for the past several months. The normal winter slow down never occurred this past year. Buyers have been out in record numbers while sellers continue to lag behind after taking last year off altogether due to the pandemic.

In this month’s real estate market update I am going to focus on 4 areas; inventory, mortgage rates, home prices, and provide an update on forbearances and foreclosures. Continue reading below, or watch the following video, for the complete update.

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Inventory

The number one thing holding the real estate market back continues to be a lack of inventory. You can’t buy what isn’t for sale. The pandemic has changed the definition of “home” and caused many to realize their current housing isn’t meeting their current needs. While showing activity has increased 49.5% year-over-year nationally, the total number of homes for sale has decreased 52% as shown on the following graph;

In both Frisco and Prosper the year-over-year inventory decline is even more severe with Frisco down 73% and Prosper down 84%. This equates to there being a 0.7 month supply in Frisco and 0.5 month supply in Prosper. A severe shortage when you consider it takes 6 months’ worth of supply for the market to be considered balanced. (I covered the impact of inventory on the real estate market in last weeks blog post)

One of the challenges with measuring inventory at the moment is many homes are selling so fast they never actually get counted in the inventory calculation. The amount of inventory available is only measured once per month. Many of the homes listed go under contract and off-market within the same month so never actually appear in the inventory calculation as any of you that have been shopping for a home lately realize.

With so few resale homes on the market, many buyers have turned to new construction but are finding that to be even more competitive. Virtually every new home community in the local market is sold out and has hundreds of prospective buyers on waitlists. Several communities I have spoken to recently won’t have new lot releases for some of their models until 2022!

The inventory shortage isn’t something that just magically appeared but has actually been many years in the making. Real estate inventory can come from one of two places- resale homes or new construction. Believe it or not, new construction never fully recovered from the real estate market crash back in 2008. Going back 50 years, an average of 1 million new single-family homes have been built each year. Construction of new homes reached a peak of 1.5 million homes just before the crash. We have now been underbuilt for 13 years in a row as shown on the following graph;

2021 is poised to be the first year we will make it back to the historical trend line. In that time the population has continued to grow and demand for housing has increased as millennials, the largest generation, have reached prime home-buying age.

When home sellers pulled back as a result of the pandemic last year, resale homes didn’t come to market, which only amplified the shortage of homes for sale.

Mortgage Rates

Lack of supply is only half of the equation when it comes to current market conditions. Record low mortgage rates are the other piece of the equation as they helped increase demand by bringing more buyers into the market. The low mortgage rates have kept affordability in check in the face of rising home prices because home prices are not the only thing that have been rising, rents have as well. In fact, rents have been rising faster than home prices, and many renters discovered it was cheaper to buy a home than to continue renting. Here’s a look at how mortgage rates have changed since January 2020;

Ironically, record-low mortgage rates have kept some potential home sellers from selling. Given so few homes for sale, many would-be sellers decided to refinance and take cash out to make improvements to their current home since they were unable to find a suitable home to purchase. I do expect buyer demand to taper as we move further into the year as mortgage rates move higher. The latest predictions I have seen expect rates to end the year between 3.5% and 3.75%. That rise in rates, coupled, with an expected increase in the number of homes for sale, should help ease market conditions slightly later in the year.

Home Prices

The rapid rise in home prices has caused some to believe the housing market is overheated and heading for a bubble. Considering what happened in 2008 I can understand that, but the fundamentals of the current housing market are very different compared to 2008. Prices are rising now based on the imbalance between supply and demand. Home prices were rising prior to 2008 due to loose lending standards and speculation. (Read my recent blog for 3 reasons why we are not in a housing bubble)

That being said, home prices rising substantially faster than inflation and wages is not sustainable. In Frisco, the median home price increased 23% year-over-year and 25% in Prosper. As mentioned, home prices today are rising in response to the imbalance between supply and demand. The current average sale price is 102% to 103% of the list price.

Assuming supply increases and we move further into the year and mortgage rates continue to rise I expect the pace of home price appreciation to slow.

What About Forbearances and Foreclosures?

When the lockdown orders as a result of the pandemic went into effect last year there was widespread speculation that housing was going to be negatively impacted and a tsunami of foreclosures would be coming our way, especially as the number of mortgages entering forbearance programs increased. Having gone through the previous foreclosure crisis, and selling homes on behalf of the banks, I wasn’t so sure. Banks are in the business of lending money, not owning homes. Short sales were introduced as an alternative to foreclosure so banks never had to take ownership of the house. Banks and mortgage servicers were quick to respond to this crisis and the strategy has worked so far. Here is a look at how the number of mortgages in forbearance has changed;

At the end of May 2020 approximately 4.76 million mortgages had applied for mortgage forbearance relief. The number of mortgages still in a stage of mortgage forbearance is 2.31 million. What happened to the 2.45 million mortgages no longer in forbearance?

As shown above, nearly 49% of them are now current. Some of those mortgages have been paid off, probably through a sale, some were brought current, and others exited forbearance after never actually needing it. Of the homes still in forbearance, 35.5% have worked out a payment plan with their mortgage company. 15.6% of the loans are still in trouble.

One thing very different now compared to 2008 is the role home equity is playing. Of the 2.31 million mortgages still in forbearance here is a look at the breakdown of equity those homes have;

90% of the mortgages still in forbearance are on homes that have a minimum of 11% equity. That equity creates options. If those homes needed to be sold, 11% equity allows the home to be sold and debts cleared.

The remaining 10% of mortgages on homes with less than 10% equity are those considered most at risk of foreclosure. I don’t believe all of those homes will end up being foreclosed on or sold as distressed properties (there is only 1 short sale on the market in Frisco and Prosper currently), but let’s assume a worst-case scenario that they all come on the market. That would represent approximately 231,000 homes. Based on the inventory shortage discussed above, it is currently estimated that 2.7 million new home listings need to come onto the market to create balanced market conditions. If, and I certainly hope they don’t for the sake of those homeowners, those homes were to come on the market they would simply be absorbed by current demand.

Bottom Line

While I am seeing an increase in new listings, the housing market remains exceptionally tight and I don’t expect to see any significant improvement until later in the year. If you want to know if now is the right time for you to consider buying or selling a home please feel free to Schedule a Call with me. There is never a cost or obligation and I would be happy to answer any questions you may have.