Traditionally, this is the time of year the real estate market heads into high gear. Momentum normally builds during the spring and the busy season lasts through the summer before settling down again as we move into fall. I think we can all agree the past year has been anything but normal so why should the real estate market be any different!

Last year’s spring season delayed making an appearance until the summer and the increase in activity we started to see last summer never settled down but just kept going right through winter and merged with spring this year. The end result is a real estate market that is crazy, to say the least, but is it overheated? To help answer that question this month’s market update is going to focus on inventory, mortgage rates, home prices, and update the latest forbearance numbers.

Continue reading below, or watch the following video, to learn more about how these four items are impacting the current real estate market and what we are likely to see in the second half of this year.

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Inventory

Inventory, or housing supply, remains the single biggest constraint in the real estate market today and isn’t just a factor in some markets, but is a problem across the entire country.

Real estate supply can only come from one of two places, resale homes or new construction. If you’ve seen any of my previous monthly market reports you will know that we have been discussing new constriction supply shortages for quite a while. This isn’t a new problem, but one that has been years in the making. New construction has been stuck in a hangover since the real estate market crash in 2007, 2008. Homebuilders didn’t reach the same level of annual completed units that we saw prior to the crash until last year, which means we have been under built for the past 13 years. Take a look at the following graph to see just how dramatic the drop off of new home construction has been:

During the past decade, demand for housing has continued to increase as more households have been created and millennials, the largest generation, has reached prime home-buying age.

The only other place housing inventory can come from is resale homes, but those have been very slow to come on the market after virtually disappearing during the pandemic. Now that restrictions are being lifted and a sense of normalcy is starting to return we are starting to see those that planned on selling last year come back to the market this year. The biggest challenge these potential sellers now face is where are they going to move if they sell their current home? The fear of ending up without a home is preventing many of these would-be sellers from moving forward with listing their homes for sale.

To give you an idea of how few resale homes are on the market here is how April 2021 compared to April 2019 in Frisco and Prosper (there is no point in looking at last years numbers as they are very skewed due to the pandemic).

• In April 2019, Frisco had 4.3 months’ worth of inventory and Prosper had 5.5 months. In April 2021, Frisco had 0.8 months’ worth of inventory and Prosper had 0.6 months. (Months inventory represents the amount of time it would take all homes listed for sale to sell at the current pace of sales. 6 months inventory is required for the market to be considered balanced)

• In April 2019, there were 1,163 homes for sale in Frisco and 452 homes for sale in Prosper. In April 2021 there were 248 homes for sale in Frisco and 68 in Prosper.

On a positive note, the 435 new listings in Frisco in April and 118 in Prosper, was the highest number of new monthly listings since July 2020.

Mortgage Rates

Low supply on its own wouldn’t be as big a problem if there wasn’t increased demand, so where is the demand coming from? As stated above, there are generally more buyers in the marketplace right now due to demographics. Additionally, the pandemic changed the definition of what “home” means for many of us. No longer just a place to rest your head at night, home became the office, school, the movies, the gym, playground, and vacation destination. A large number of people began to realize their current “home” no longer met their needs and with an increasing number of workers learning that remote work will become more permanent, there has been a shift in people moving further away from work in an effort to obtain more space.

While much of the focus has been on rising home prices, rents have been rising steadily as well. In Frisco, according to data from the latest US Department of Housing and Urban Development study, rent for a 4 bedroom home ranges from $2500 to $3400 per month.

Enter historically low mortgage rates. Mortgage rates falling to the mid 2% range for a 30-year fixed-rate mortgage was the equivalent of throwing gasoline on an already raging fire.

Even though home prices were rising, many renters were finding that the monthly mortgage payment was less than the rent payment for that same 4 bedroom Frisco home, plus they received all the benefits of homeownership.

While we did see a decrease in the number of new mortgage applications as rates began to rise in early March, rates fell again in April, unexpectedly, and are back under 3% at the time of this writing. The decrease in rates did cause new mortgage applications to tick up again, but rates are expected to increase throughout this year and next, but not as much as expected just a couple of months ago. Here are the latest mortgage rate projections:

Even though mortgage rates are expected to rise, they aren’t expected to rise enough to significantly impact buyer demand. A recent survey by the Wall Street Journal showed the number of people planning to buy a home in the next 6 months is the highest percentage it has been since 1978:

Home Prices

Multiple offers, bidding wars, and homes selling for thousands over list price have many fearful we are in a bubble and that a crash must be on the horizon. While the current market is unnerving, especially for those trying to buy a home, and the pace of appreciation certainly isn’t sustainable, it doesn’t mean we are in a bubble or that a crash is imminent. In bubble markets, whether stocks, houses, or any commodity, prices rapidly appreciate even though there is no underlying market, or economic, condition driving them. Home prices rose rapidly right before the previous crash even though there was plenty of supply. The housing market was being driven by speculation and an insatiable thirst to originate new mortgages whether the borrower could afford the mortgage or not. Nothing made sense at the time.

In the current market, as explained above, we are in a very inventory-constrained market with very high demand. Whenever you have limited supply coupled with high demand, prices go up. The pace of appreciation has risen as supply levels have fallen. As more inventory comes on the market, which is widely expected later this year, and mortgage rates rise, I believe we will see the pace of appreciation moderate. If nothing else, some buyers will start to get priced out of the market despite the historically low mortgage rates.

It is also important to point out, especially in the case of new home prices, that high demand and low supply of raw materials are driving construction costs ever higher. The price of lumber is up 300% year-over-year and the National Association of Home Builders recently announced the cost of building the same new home is $36,000 to $43,000 more this year than last. It’s no wonder new home builders are limiting lot releases and new contract signings. They can’t sell a home that won’t be ready for 8 to 12 months when they can’t guarantee the delivery or cost of materials.

Here is the latest forecast of how much home prices are expected to rise this year on a national average:

Forbearances

After unemployment soared last year following the complete lockdown as a result of the pandemic, approximately 5.9 million mortgages entered mortgage forbearance. There was widespread speculation that all of these forbearances would lead to a massive increase in foreclosures and distressed sales and a market similar to 2008 was all but bound to happen. So where are all the foreclosures?

I realize that an eviction moratorium has been in place, but also want to point out that banks are not in the business of owning homes. After working with banks during the last crash I knew the last thing banks wanted was a bunch of properties on their books. The government, banks, and mortgage servicers have really done a great job at getting out in front of this problem to make sure it didn’t turn into a crisis.

Currently, the number of mortgages in active forbearance is less than half what it was in July 2020 and an additional 400,000 mortgages left forbearance in the last 2 months:

So what happened to all the mortgages that are no longer in forbearance?

As you can see in the graph above, 47.3% of the homes that left forbearance are now current on their mortgage or have paid their mortgage off, probably by selling. 36.5% have worked out an arrangement with their lender through a loan modification or deferral, and 16.2% remain in trouble. Of that 16.2%, 1.6% are agreeing to a short sale, deed-in-lieu, or another payment plan. The 14.6% represent the mortgages no longer in forbearance that are still in trouble, which equates to approximately 524,140 homes.

Two weeks ago the Wall Street Journal reported that we need approximately 8 million properties to come to market in order to bring us out of the supply problem and create balance in the real estate market. Even if all 524,140 homes were to come to market as new listings it isn’t enough homes to make much of a dent in the current supply problem and certainly won’t lead to a housing downturn.

Bottom Line

While I don’t believe conditions in the current real estate market can be defined as a bubble or will lead to a crash, real estate is only one segment of the overall economy. The jobs report this month was not what was expected and there are signs of broad inflation starting to appear, which could cause mortgage rates to increase faster than expected. What will happen in the real estate market is largely dependent on what happens to the overall economy as a whole. Do I think we could see a correction, not a crash, with a softening of prices in some markets? I do, but I don’t believe we will see it in the next 12 to 24 months unless something unforeseen is to happen.

Have a question or a specific real estate situation you would like to talk through? Please Schedule a Call as I’m always happy to talk with you and help in any way that I can.