Housing Sales Buoyed by Record-Low Interest Rates

Housing today has the greatest intrinsic and price values in our lifetimes as we spend more time than ever before at home. Median home prices rose a phenomenal 14.5 percent to $310,800 in the 12-months ending November 2020 according to the National Association of Realtors (NAR), with year-over-year sales of existing properties up 25.8 percent. The latest 12-month price gain is four times the average annual increase in the prior 10-years. Demand was driven by the pandemic, demographics and and fueled by record low interest rates.

Good news is that housing price gains are not a bubble as was seen in 2004 through 2007, but are due to a massive increase in the demand for homes. The 2004-2007 bubble was a speculative demand based on the hope of getting rich. A fellow professor at Texas A&M described such a bubble as the Bigger Sucker Doctrine. A sucker would pay too much for a property in hopes that a bigger sucker would come along and pay more. Properties were not acquired to occupy or rent, but rather just to trade. Akin to the planets lining up, interest rates, the pandemic, demographics and constricted new-home construction (due to limited supply of everything from workers to materials and even including appliances) increased the demand for housing with demand outstripping supply and prices going up – just Econ 101 said.

Surprisingly, despite being a hot seller’s market, affordability still remains today. The table shows the relative affordability of existing homes for the prior 10-years plus an estimate for 2020. Median home prices (NAR) and 30-year conventional mortgage rates (Freddie Mac) for November are utilized since 2009 to calculate the monthly principal and interest (P&I) payments assuming 20-percent down with an 80 percent fully amortizing mortgage. Annual P&I payments are then expressed as a percentage of the annual median household income. Assuming that U.S. median household income will increase at the same rate as inflation in 2020 – as measured using the CPI – then buying the median-priced home with a 20 percent down payment, annual total P&I would require 17.6 of income. In the prior 10-years, five of the years were more and five were less, placing 2020 affordability right in the middle.

To view annual data since 1989 and read an earlier blog click https://blog.stewart.com/stewart/2020/10/06/housing-affordability-a-lot-better-than-you-think-and-a-phenomenal-2021-outlook/

As stated earlier, home price gains are not a bubble, but are based on the interaction of supply and demand. Rates will eventually rise and make the impressive affordability seen today dissipate. A jump in rates combined with another recession would see home values probably stabilize with the potential of home price declines. The one agreement on the future of interest rates is to disagree. While the latest forecast from Fannie Mae calls for 30-year, fixed-rate conventional mortgages to average 2.9 percent in 2022, the MBA sees rates rising to 3.6 percent. That range, however, still sees P&I requiring from 17.9 percent to 19.5 percent of income to service the mortgage – assuming a static price.

The bottom line is that housing is incredibly affordable today and is likely to continue to be so in 2021. Expect a good housing market in 2021.