When the COVID-19 pandemic began last year, it threw our world into upheaval. If asked a year ago, I would not have predicted that real estate values would experience record growth. Will this growth continue, or will it cool off? Here are five reasons values are likely to continue trending upward, at least for the rest of 2021.
According to the National Association of REALTORS (NAR), millennials made up the largest share of home buyers at 38% in 2020. Millennials are growing up and their priorities are changing. Their incomes are growing and the idea of settling down and purchasing a home takes hold. This is not likely to change. Millennials surpassed the baby boomers as the largest living generation. As such they will continue to drive the growth in the real estate market.
2. Interest Rates
In its Federal Open Market Committee (FOMC) meeting held January of this year, the Federal Reserve kept the fed funds target rate set at zero to 0.25%. In addition, the Fed reinforced their message. They will continue to provide support to the economy until recovery is complete. With unemployment at 6.7%, considerably higher than the pre-pandemic unemployment rate of 3.5%, that recovery may take a while. A low interest rate environment will continue to drive growth in the real estate market.
3. Pandemic Effect
With record unemployment, one would think the real estate market would suffer. But 2020 showed year over year growth of 13.8% as of October. Why? Because this pandemic is not an equal opportunity offender, hitting lower wage earners the hardest. As of January 2021, the leisure and hospitality sector had the highest unemployment rate of 15.9%. The average annual salary for this sector is around $36,000 per year whereas the median salary of a typical home buyer is $75,000. So while this pandemic is wreaking havoc on certain demographics, the typical home buyer may not be affected.
4. Home Sweet Home
The lock down in March of 2020 meant you spent a lot of time in your home. Parents began working from home and children started distance learning. This new living dynamic put pressure on your living space and helped fuel the real estate demand. Even while economies are opening back up, some companies are continuing work from home policies. Additionally if you were lucky enough to escape the economic hardships of the pandemic, you may have extra money that was not spent on vacations, sports tickets, or eating out. That unused discretionary income can now be used for a down payment on a house, keeping the real estate market hot.
5. Supply and Demand
Another factor driving real estate values upwards is the good ole rule of supply and demand. There are just not enough homes available for sale to meet the demand, creating bidding wars and driving prices higher. In the U.S., the monthly supply of homes has been declining since the Great Recession. March of 2020 decreased supply even more as potential listings were pulled due to the pandemic. Supply should increase, as we are starting to see, as vaccinations are rolled out and people are more comfortable with strangers in their home. But it may take a while to get back to pre-pandemic inventory.
Even with these positive signs for the real estate market, some questions remain. According to the Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey as of March 2021, 2.6 million homeowners are currently in forbearance. What will happen when forbearance ends? Also, with the average sales price of a home topping over $390k, affordability will be an issue for many potential home buyers. Will this affect demand in the longer term? For the short term, the future of the real estate market looks bright.