Economy expert shares insight on the success of housing amid the pandemic
Builder and Developer: The housing market has continued to remain active despite the economic downturn. What are some trends we’re seeing with home sales and what is fueling this activity?
Gay Cororaton: Existing-home sales are strongly rebounding, although sales are still trending below last year’s level. Existing-home sales rose nearly 21% in June compared to May, to an annual rate of 4.7 million, after slumping to 3.9 million in May. However, existing-home sales are still 11% below last year’s level.
Most states eased on shelter-in-place measures in May and that allowed for more contract closings in June. Housing demand has been pretty robust even before the pandemic hit—existing home sales were running at an annualized rate of 5.76 million in February. Demand is being propped up by low mortgage rates, with the 30-year fixed mortgage rates now hovering at 3%, so mortgage applications are up by about 20% year-over-year. On a single-family detached home where the median price is $298,600, the mortgage payment is just $1,036–just a tad higher than the median rent of $1,033, assuming a 20% down payment.
GC: NAR tracks median prices of single-family home sales in 181 metros, so home prices rose in 174 metro areas. Fifteen metro areas experienced double-digit price growth, including: Kingston, NY (17.6%); Huntsville, Ala. (13.5%); Memphis, Tenn. (13.4%); Boise, Idaho (12.6%); Spokane-Spokane Valley, Wash. (11.8%), Indianapolis, Ind. (10.8%); and Phoenix, Ariz. (10.2%).
In the higher-priced metro areas, home prices did not appreciate as much or even declined from one year ago, such as Los Angeles where prices rose 2.6%, San Francisco where prices were flat, and Boulder, Colo. where prices fell 3%.
BD: In terms of pricing, are we seeing any notable changes compared to pre-pandemic trends?
GC: Prior to the pandemic, prices were already falling or appreciating at a slower pace in expensive metro areas such as San Francisco, San Jose and Denver, while relatively affordable areas such as Boise, Spokane and Salt Lake were seeing strong price growths. That trend is continuing at this time.
BD: One hot topic of the housing industry has been the subject of affordability. What are some of the greatest challenges in making housing more affordable in our nation and what are some solutions?
GC: The main challenge in addressing affordability is increasing housing supply, especially at the low end of the market, or below $250,000. The level of inventory is just equivalent to 4 months of the current pace of demand, below the 6-month’s normal level. That is why prices have not fallen if sales declined— supply is constraining sale and pushing up prices. As of June, housing starts are running at an annualized rate of 1.2 million, which is below the 1.6 million net household formation we’ve seen in 2019. So supply has to increase to around 1.6 million, which is achievable, because in December 2019 through February 2020, housing starts had ramped up to around 1.6 million.
The main issue hampering new construction is zoning and land use regulations where most areas are zoned for single-family detached homes, but the only way to increase housing supply is to increase housing density through more townhomes and multiplexes (the pandemic is creating a greater challenge increasing housing supply through condominium buildings). I don’t see any labor shortage issues because there are three construction job workers looking for work for every one open job.
BD: What is your prediction for the general outlook of the housing market for the rest of 2020? Can we expect a robust rebound or will we be back at pre-pandemic levels?
GC: The June data is already showing a strong rebound so we will continue to see a strong rebound in the second half of 2020. NAR forecasts existing-home sales to hit 5.6 million by 2020 Q4, which will be higher than the 5.42 million in 2019 Q4.
BD: What sorts of impacts do you think the coming presidential election will have on the homebuilding and housing industry?
GC: Elections have an impact on consumer and business confidence and how businesses and households view the future with respect to their business, income, and employment outlook. Housing is a long-term investment, from both the builders’ and homebuyers’ decision-making process.
BD: Anything we didn’t go over that you think should be mentioned?
GC: The commercial and residential real estate market and economic outlooks are very much tied to how states are able to balance opening up their economies while doing so safely.