Since 2011, the residential real estate market has been steadily climbing. Housing prices have increased year-over-year in most major markets, with the housing medium rising 55% over the last decade (June 2010 to June 2020). This bullish market has proven beneficial to investors and homeowners across the country. However, as a result of the 2020 market, some analysts predict that 2021 may experience a significant shift. We may be transitioning to a bear market as soon as January 2021.
To prepare every homeowner for future uncertainty, we want to provide insight into what influences this prediction and what actions homeowners (and homebuyers!) can take to prepare for the potential change.
Factors Impacting the Current Market
To understand why the market may be shifting, it is imperative to outline factors impacting today’s strong market.
- COVID-19. We could not proceed with discussing 2020 without identifying the impact COVD-19 has had on the economy. The year started out strong – a booming economy and low unemployment rates proved hopeful for the rest of the year. However, in early 2020, the pandemic swept across the globe, creating unanticipated market shifts in every country, including the US.
- Low-Interest Rates. In March 2020, the Fed cut rates to zero, down from its previous target range of 1% to 1.25%. As a result, interested rates have declined, with some homeowners obtaining mortgages with interest rates as low as 2.25%.
- High Demand. Buyers interested in taking advantage of low-interest rates overwhelmed the market. As a result, lenders had to tighten their standards and become more selective when choosing their borrowers.
- Low Inventory. Due to fears related to COVID-19 as well as an upcoming election, many homeowners put their plans on hold. Consequently, inventory has remained low across the states – Reports from October 2020 indicated a 36.6 percent decline in national inventory year-over-year.
- Higher Home Prices. High demand and low inventory have resulted in increasing home prices. According to Realtor.com, “The October national median listing price was $350,000, up 12.2% compared to last year. Large metros saw price gains slow, but prices are still 8.9% higher than last year.”
- Moratorium on Evictions. Although 2020 has proven to be a hardship for millions of Americans, many missing their mortgage payments have been protected under numerous suspensions placed on evictions. This has resulted in an even lower inventory than predicted.
What Could Cause A Shift in the Market?
Now, all the indicators show that 2021 could be a continuation of our bullish market. The Fed has signaled that rates will remain low through 2022, keeping demand high; furthermore, ongoing threats of COVID-19 have kept homeowners reluctant to move, resulting in continued low inventory. The perfect combination of a healthy market. However, one aspect is changing that may throw a wrench in the market’s current flow – The end of the moratorium on evictions.
The End of the Moratorium on Evictions
According to Trading Economics, the “unemployment rate in the United States averaged 5.76 percent from 1948 until 2020, reaching an all-time high of 14.70 percent in April of 2020.” Since then, rates have declined to 6.9 percent, yet millions of Americans are still facing eviction.
The loss of employment caused many to miss payments, either on their mortgage or on their rent. They, however, have been protected. The most recent protection enacted by the CDC has placed a moratorium on evictions through January 2021. However, with this pending deadline, homeowners across America may be facing an uncertain future.
According to Frank Martell, president and CEO of CoreLogic, recently reported that “Forbearance programs [have continued] to reduce the flow of homes into foreclosure and distressed sales and [have] been the key to helping many families who have been particularly hard hit by the pandemic.” He continued, “Even though foreclosure rates are at a historic low, the spike in 150-day past-due loans points to bumpy waters ahead.”
Dr. Frank Nothaft, chief economist at CoreLogic explained, “Five months into the pandemic, the 150-day delinquency rate for August spiked to 1.2%… This was the highest rate in more than 21 years and double the January 2010 peak during the home-price bust. The spike in delinquency was all the more stunning given the generational low of 0.08% in March and April.”
Proceeding into 2021:
The reality is that although unemployment rates are rising and the economy has remained promising, 2021 may bring an influx of evictions. There will be an estimated 2 million loans seriously delinquent by the beginning of the year.
As these lenders foreclose, inventory will spike. Lenders will be less focused on selling at premiums and instead focus on recapturing their losses. As a result, home prices will drop as supply increases.
Those looking to maximize on their home sale should act soon. Current limited inventory places homeowners in the optimal position, with homes selling at record highs. Waiting could prove to be detrimental – Unless, however, forbearance programs continue to keep homeowners from being evicted.
For those looking to buy, good news! As mentioned, the Fed has suggested that rates will remain low. An increase in inventory and a decrease in home prices will provide more opportunities for buyers. Unfortunately, lenders are expected to continue to be more restrictive in selecting borrowers, making financing more difficult for unqualified buyers. Additionally, the already competitive buying market is expected to bring even more competition, making it difficult to be selected for the house of your dreams.
If 2020 has proven anything, we cannot tell what will come in the following weeks. The best plan of action any homeowner or potential buyer can take at this time is to stay prepared and be ready to act. Market swings have proven unpredictable, and California residents do not want to miss an opportunity on their investment.