COVID-19 has changed where we live, how we live, and what type of office space we need, all of which directly benefit the housing market. Today, more than ever, our homes act as a place of refuge—and the direct result is decade-high sales for home builders. Housing is the brightest spot in the U.S. economy today, but a key question remains: Will its V-shaped recovery continue or taper off?
At the onset of the pandemic and for the six weeks that followed, the housing market was crushed. However, home sales improved starting in May, and then took off in June. In August, new-home sales reached 1 million (seasonally adjusted annual rate) for the first time in over a decade, and the Meyers Research New Home Pending Sales Index hit cycle highs, with contract sales up 39% year over year.
These record sales are driven by a variety of sources, including favorable demographics, historically low mortgage rates, and an exaggerated need for space. While there are risks for the sustainability of each, we believe these three factors will continue to be key drivers of housing demand for 2021.
Key Demand Source #1: Demographic Tailwinds
The housing market started 2020 hot as buyers looked to beat the spring selling season rush. The brief pause in home sales in March and April due to COVID-19 and the subsequent rebound impacted buyers across all ages and life stages, but first-time buyers came back stronger than ever.
Millennials, those born between 1980 and 2000 (exact time frame varies by source), proved once again to be the key buyer group, representing about 40% of all home sales. There’s still more potential in this group, however, given that the homeownership rate for those under 35 years old is roughly 40% compared with 64% for adults aged 35 to 44 years old. As millennials get married and start families, the demand for homes will continue to grow.
Beyond millennials, both Gen Xers (those born between 1960 and 1980) and Baby Boomers (1940 to 1960) are facing life stage and lifestyle changes related to COVID-19, retirement, and age that also bode well for future housing demand. Don’t discount Gen Z (2000 to 2020), either. With the oldest members at 20 years old, this next generation will be critical in medium-term demand.
Bottom Line: These demographic tailwinds are not going away and will drive the housing market for the next 10 years, but one major risk remains: the economy. Further job losses or a hit to consumer confidence could temporarily dent this demographic-fueled demand.
Key Demand Source #2: Historically Low Mortgage Interest Rates
Housing is a monthly payment business, so with the cost of borrowing at unprecedented lows, many consumers are enjoying much-needed affordability relief. In fact, the average 30-year fixed-rate mortgage has remained below 3% for eight straight weeks, currently sitting at 2.87%, or 86 basis points below last year’s levels. Nationally, new-home affordability is worse than during March and April, but is back to levels seen at the start of 2020, when the housing market was hot pre-COVID.
While market forces ultimately drive mortgage rates, we take solace in the fact that officials at the Federal Reserve have expressed the desire to keep the federal funds rate near zero through 2023. The federal funds rate is not equal to mortgage rates, but historically the two have been closely correlated. In turn, we expect mortgage rates to remain low in the short term and continue to be a boost for the market.
Bottom Line: We believe low mortgage rates are sustainable, but voice caution over affordability in the next one to two years. As builders see insatiable demand, many have enjoyed the opportunity to raise prices. Lower mortgage rates are offsetting home price growth for now, but based on our calculations even a 5% increase to the national median new-home price would price out nearly 2.5 million households.
Key Demand Source #3: A Stronger Relationship With Our Home
Americans across the country have a newfound relationship with their homes thanks to the past six months of sheltering-in-place. We have developed a multidimensional reliance on our home as it has become our office, gym, school, bar, and restaurant. This shift has manifested a desire for more space that wasn’t previously there, and with resale inventory at historically low levels, builders have been the clear winners.
Bottom Line: We know the shift to the suburbs is not a new phenomenon for buyers, but we’ve seen the trend exaggerated because of COVID-19. We expect buyers to continue to look for homes in the suburbs that meet their evolving needs, but warn that the farthest-out locations may lose their appeal when more people return to the office. In addition, many builders are burning through lots quicker than they can replace them, which could artificially hold back sales.
Today’s housing strength isn’t exclusively fueled by demographics, low mortgage rates, and a stronger relationship with our home; the robust stock market and healthy home equity are among the other positives fueling demand. All of these factors have staying power if the economy continues on this growth path but there’s no shortage of economic risks today, including a slowing or backsliding economy with accompanying job losses, a continued delay in getting more stimulus passed, or the impact of winter on COVID-19 cases and business profitability.
Nik Scoolis of Meyers Research contributed to this article.
