Residential Magazine

The housing-market boil is likely to shift to a simmer

By Victor Whitman

This spring’s homebuying season could be the strongest since the boom of 2006. With millennial buyers chasing properties, low interest rates, a receding COVID-19 health crisis and the expectation of more homes on the market, housing economists are predicting that home sales and mortgage volumes will surge this spring and run hot through the summer.

“This year is going to look pretty good,” says Frank Nothaft, chief economist for CoreLogic.

This year, however, could become one with two distinct parts, running hot in the first half of the year and then cooling considerably in the second half. Fannie Mae is concerned that the U.S. economy may burn too brightly after the massive new government stimulus package passed in March 2021, potentially setting up the housing market for a boom-bust scenario.

Leading forecasts from the National Association of Realtors (NAR), Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) all project another strong year for new- and existing-home sales to piggyback on last year’s surprisingly strong, pandemic-affected surge. Although the 2020 spring homebuying season fizzled due to the emergence of COVID-19, the market rapidly recovered even as the pandemic devastated other areas of the economy.

Sales of new and existing homes will likely exceed last year’s total of roughly 6.5 million homes sold. Fannie Mae, for example, predicted total home sales will rise by nearly 7% year over year to 6.9 million.

The outlook for the residential mortgage market also is strong, although refinancing activity is expected to cool off substantially this year. According to the MBA’s February 2021 forecast, home-purchase origination volume is projected to rise 10.5% over the 2020 level to $1.57 trillion in 2021.

According to Nothaft, spring and summer homebuying activities will mirror what occurred in 2020, when millennials were prodded by record-low interest rates. With so many buyers chasing limited numbers of homes for sale, NAR reported that the average U.S. property was selling within 21 days of listing as of this past January.

“I have not found ever, in the United States, 30-year mortgage rates lower than what we have seen over the last several months,” Nothaft says. “It’s really, truly unprecedented, and for many millennials and Gen Xers, they saw this and they said, ‘Whoa, what an opportunity.’”

Although interest rates earlier this spring had risen modestly above their record lows, this year has two additional ingredients that should indirectly spur buyers and sellers to action: more certainty about the virus and the $1.9 trillion federal stimulus package passed in the early days of the Biden administration.

“That’s really going to help drive economic growth and lead many families to feel much more economically secure about their own personal financial outlook,” Nothaft says. “It gives them the confidence that the job they have today is a job they’ll have in the future, that they’ll be able to make the payments on the mortgage, and enter the market and buy a home this spring.”

The torrid pace of sales and price gains, however, should slow in the second half of 2021. According to CoreLogic, the aggregate U.S. price rose by 10% year over year this past January, but the data analytics company projected the aggregated annual gain this year to be only 3.3%.

The massive size of the combined stimulus over the last two years raises the boom-bust scenario.

Doug Duncan, chief economist, Fannie Mae

One reason why is that homebuyers should have more choices. Last year’s double-digit price gain had much to do with historically low inventories of for-sale properties, which carried over to the start of 2021. NAR chief economist Lawrence Yun said that tight inventory may have reduced home sales this past January by as much as 20%.

More existing homes are expected to come on the market as the health crisis recedes. Given the health risks and an uncertain economy, many baby boomers delayed listing their houses for sale during the pandemic. As infection rates come down, however, boomers are expected to be more active sellers, which should moderate prices.

The outlook beyond this year is a question mark, however, says Doug Duncan, Fannie Mae’s chief economist. In line with other major forecasts, Duncan’s mainline outlook is that the housing market will slow to a sustainable level next year rather than fall off a cliff.

But Duncan also says the stimulus could produce a bleaker alternative scenario. He notes that the March stimulus package will likely propel gross domestic growth to an unstainable annual rate of 6% or even higher this year. Duncan notes that supercharged growth usually produces inflation and a counterreaction by the Federal Reserve, which could raise short-term rates and take other measures to battle inflation. These ingredients could potentially turn the housing boom of 2020 and 2021 into the bust of 2022 and beyond.

“What we have right at the moment is this massive stimulus that is general and broad rather than targeted and narrow,” Duncan says. “The massive size of the combined stimulus over the last two years raises the boom-bust scenario.” ●


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