The 2021 real estate market continues to be full of surprises, with homebuyers catching a break between continued low mortgage rates and more homes unexpectedly being listed. While these short-term trends offer some hope for eager homebuyers, it is unclear how long they will last before regressing to the slowed market we have to come to see.
July saw benchmark mortgage rates drop below 3%, as reported by Freddie Mac, which signals that demand still exists in the market. Building on that, May saw an uptick in pending home sales increasing 8%, according to the National Association of Realtors. Every region across the country saw an increase in transactions, coming from sales of new homes and previously owned homes. Low-interest rates and more homes on the market are great news for homebuyers, whose demand remains.
Some predict that this recent increase in market activity could be sustained through the end of the year, citing the robust stock market as the primary indicator. However, many economists feel that a sluggish market will define the second half of 2021. Prices have risen too high for many homebuyers to afford, mainly caused by a lack of available homes on the market.
The Current Situation
Many believe that the reopening of the economy is causing inflation as the vaccines rollout and associated restrictions loosening. There is debate among economists on whether this inflation will be a temporary adjustment period or prolonged beyond this "reopening transaction." The housing market has been a poster child of the rising prices, and this inflation may be here to stay.
Despite the recent uptick in pending sales and mortgage rate dips, the most telling indicator of where the market exists currently is mortgage applications. The Mortgage Bankers Association shows that mortgage applications have declined for the second straight month while the average loan size has increased for the fourth consecutive month. The low mortgage rate encourages more buyers to the market, but the ever-increasing price of the homes is still pushing homeownership out of reach. Again, more sellers may put their homes on the market if they feel like they can get a strong return for it, but they still need somewhere to live. Ultimately, affordability is the biggest issue for many homebuyers in the second half of the year and will remain until there is an influx of supply.
Millennials Becoming Homeowners
Another critical factor of the feverish demand within the market is America's largest generation becoming homeowners. For years, Millennials felt that homeownership was out of reach for them after experiencing numerous financial crises and overwhelming student debt. However, at the time when the pandemic began, Millennials found themselves at the prime homeownership age for first-time buyers, as well as the financial means to finally afford homes. This demographic found the pandemic an excellent time to consider homeownership, as they faced the shifts to their work-life balances due to it. This homebuying demand from the millennial demographic weaves into the larger story of "pandemic demand in the seller's market." However, Millennial's eventual homeownership boom was a crisis in the making far beyond the pandemic ever began.
In the years following the Great Recession, homebuilding considerably declined, and various sectors within the construction industries downsized their operations as demand for new homes faded. Daryl Fairweather, the chief economist at Redfin, explains that there have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s. While the pandemic magnified the lack of homes across the nation, the market had not prepared for the Millennial demographic to become homeowners. The construction industry is currently ramping up production to relieve the shortage, but they face their own set of obstacles that are slowing new builds.
Like the many turns throughout the real estate market in 2021, different analysts have tried to predict what will come next. Despite their best attempts, this market finds a way to defy expectations. Some see this current market as transitionary, brought about by the vaccine rollout and the world shifting back to old habits. The shortage of homes and affordability on the market will remain the primary limiting factor for homebuyers, specifically millennial first-time homebuyers, as they attempt to move toward homeownership.
With new construction ramping up to bridge the gap between supply and demand, the efforts will not come quick enough to alleviate the current shortage of properties. Homebuyers priced out of their market will need to be patient as the supply is built or move to more affordable regions. Despite this, there may be a ray of hope for homebuyers on the horizon. Fannie Mae reports 77% of respondents from their June survey felt that it's a good time to sell. We will continue to keep an eye on this and see if sellers follow through on this sentiment by adding new listings to the market.