The housing market has been gaining strength in the last few years -- particularly during the COVID-19 pandemic. Home values soared, buyer demand jumped, and mortgage rates hit historic lows. And ultimately, it’s made housing one of the few bright spots during an otherwise difficult time.
But the housing market is always in flux, and real estate trends come and go. Throw in that this industry is highly localized, with different conditions in every city, state, and metro area, and you can’t bet on things staying stagnant for long.
Fortunately, understanding the fundamentals of the market can help you stay on top of all these changes. Check out some of those fundamentals below, and scroll down for the most up-to-date real estate trends of the month.
Real estate prices
House prices are influenced by a number of factors, including local buyer demand and the amount of housing supply that’s available for purchase. Generally speaking, high demand and low supply cause housing prices to rise.
Mortgage rates can also play a role since they impact demand. When rates are lower, there tends to be more interest in buying homes. When rates rise, demand might wane a bit.
At the national level, home prices have been rising for some time. As of the end of 2020, the median home price was just under $347,000. Home prices jumped 11% across 2020 alone.
Affordability isn’t just a result of house prices. Incomes, inflation, and interest rates also play a role. So rising prices? They don’t always mean homes are getting less affordable. If rates are particularly low or incomes are increasing, homebuyers might actually be able to afford more house than they could have previously.
Fortunately, that’s exactly the scenario we’re seeing today. When factoring in rates, income trends, and inflation, consumer house-buying power was actually up 21% by the end of 2020.
Mortgage interest rates play a big role in the housing market, impacting demand, home prices, and affordability. They also fluctuate daily based on a whole slew of factors, including Federal Reserve policy, the bond market, investor interest in mortgage-backed securities, and, of course, inflation.
In early 2021, mortgage rates hovered around all-time lows, according to Freddie Mac. The average rate on a 30-year, fixed-rate mortgage was just 2.74% in January, up from 3.62% the year before and 4.76% a decade prior.
Housing inventory -- or the supply of homes that are currently available for purchase -- is another important factor in the housing market, too. When inventory is low and demand is high, it creates a seller’s market. Home prices rise, bidding wars erupt, and sellers have the upper hand in negotiations.
If inventory is high, on the other hand, buyers tend to have the advantage. In a buyer’s market, there are more available listings than there are buyers to purchase them. This slows down price growth and makes the market less competitive overall.
As far as today's inventory goes, supply has been very low in recent years, and the coronavirus pandemic only worsened things. With sellers leery about having strangers in their homes -- not to mention loads of economic uncertainty -- the number of for-sale listings plummeted in 2020, at one point reaching its lowest level ever recorded. Listings have since recovered slightly but still remain fairly low. It’s possible widespread vaccinations will help loosen supply constraints and get sellers back on the market, but, of course, only time will tell.
Delinquencies and foreclosures
Mortgage delinquencies and distressed properties like foreclosures and REOs are another part of the market to pay attention to, especially if you’re an investor. Both of these tend to rise in times of economic hardship. (Case in point: During the financial crisis over a decade ago, there were around 3.8 million foreclosures.)
Though the pandemic has certainly caused some economic trouble -- not to mention plenty of job loss -- the same isn’t occurring this time around. That’s thanks to a variety of foreclosure bans (one from the White House for government-backed properties and another from the Federal Housing Finance Agency for those with Fannie Mae- and Freddie Mac-owned loans). As of early 2021, foreclosures were actually down 80% due to these measures.
Housing market cycles and crashes
Real estate, along with the overall economy, tends to be cyclical. There are booms and busts, and as we saw with the housing crash back in 2007-2008, some of these extremes can get pretty bad.
Fortunately, most experts don’t think we’re nearing another crisis just yet. Though the economy is in a recession, there are a few key differences in today’s housing market versus those of downturns past.
For one, property owners have record levels of equity. Between Q3 2019 and Q3 2020, homeowner equity jumped by $1 trillion, and according to recent data, a mere 3% of properties have negative equity. This equity protects borrowers in the event their homes lose value, giving them a sort of buffer if the market turns.
Lending standards are also stricter than they once were, so homeowners likely have fewer debts and better credit profiles; overall, they're more financially equipped to handle the mortgages they’ve taken out. On top of all this, there are low interest rates to consider. The Federal Reserve has committed to keeping the federal funds rate around zero until at least 2023. This should keep mortgage rates low and housing demand high for the foreseeable future.