The Great Reshuffling

Various economic and social factors will fuel housing demand for a while

By Dr. Svenja Gudell

The heightened demand, elevated sales activity and rapid price appreciation that have marked much of the past year in housing are unlikely to fade anytime soon. Instead, a host of demographic, economic and social factors will continue driving the market forward.

The huge millennial and Gen Z generations are just entering their prime home buying ages, and their presence in the market will be felt for years to come. Ultra low mortgage interest rates and an economy that is growing again after a year in hibernation will also keep housing demand high. And the pandemic itself has also led millions to reconsider their housing needs and wants and to seek more space, more affordability and/or more flexibility in where and how they live.

Zillow calls the confluence of these various trends “The Great Reshuffling.” And rather than fading away as the pandemic passes and markets return to something closer to “normal,” it is very likely this reshuffling is only just beginning. 

rather than fading away as the pandemic passes and markets return to something closer to “normal,” it is very likely this reshuffling is only just beginning.

The combined number of millennials turning 34 over the next decade — the median age of first-time home buyers in 2019 — is roughly 46 million, the largest such number ever recorded. And as millennials age, there are millions more of their younger peers in Gen Z behind them waiting in the wings. It adds up to millions of potential new buyers in the future — representing “built-in” demand that is extremely unlikely to fade even if market conditions change in coming years.

The pandemic itself also drove housing demand even higher. Suddenly, many Americans who were no longer commuting and were instead spending almost all of their time at home were left with an entirely new set of criteria when considering what they wanted their home to be. But rather than acting as a one-time demand stimulus, there are ample reasons to believe these reshuffling and reconsideration trends have only just begun. 

An overwhelming majority (95%) of experts recently surveyed by Zillow said the consumer preference for working from home at least part-time is here to stay. And prior Zillow research found that almost 2 million U.S. renters that currently can’t afford to buy an entry-level home in their current metro area could potentially afford one if they took advantage of increased telework options and moved to a less-expensive locale. As more companies consider making more-flexible work-from-home arrangements permanent, the future boost to demand could be significant. 

Mortgage interest rates remain near all-time lows, and look set to remain accommodative for the foreseeable future. This sustained period of low rates has helped make homeownership more accessible and affordable for millions — especially compared to renting. As of January 2021, households that owned their home could expect to spend just 17.65% of their household income on their monthly housing payments, down from almost 20% just two years earlier. 

Still, there are challenges. Low mortgage interest rates don’t help buyers save an adequate down payment, which can feel like trying to hit a moving target as prices themselves keep rising. Inventory of available homes to buy is far below what is needed to meet demand, fueling intense competition and driving prices ever higher. And time will tell if sellers that were reluctant to list their homes for sale during the pandemic feel safer doing so as vaccination campaigns roll on. 

That leaves builders with an enormous opportunity to step in — the last time the four-quarter rolling average of homeowner vacancy was as low as it is currently was 1957. When there are so few vacant homes to sell and potentially add to supply, building needs to fill the void. Obviously, more homes can’t just be willed into existence, and recent volatility in the price and availability of land, labor and lumber continue to weigh on homebuilders’ output. And the number of homes authorized but not yet started surged this spring to the highest level ever recorded (seasonally adjusted measure)  — a sign that builders are waiting for some sales certainty before committing to putting hammer to nail. 

But despite these challenges, building activity and builder confidence remain very high. And with demand for homes still so elevated, it’s unlikely that builders will take a pessimistic turn anytime soon. What’s more, recent hints that lumber prices may finally be moderating could lead some to ramp up activity further and push already-strong construction levels to new post-pandemic highs — helping ensure the housing market as a whole stays on solid ground.

Dr. Svenja Gudell is the Chief Economist of ZIllow Group.

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