Housing affordability is looking to be a critical topic in 2021, as we see residential real estate prices continue to rise. Christopher Rugaber of AP News reported last week on new S&P CoreLogic Case-Shiller Index numbers, showing that home prices jumped 7.9% in October—the biggest jump over the past six years.
Source: S&P CoreLogic Case-Shiller Index
Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices, notes that “Although the full history of the pandemic’s impact on housing prices is yet to be written, the data from the last several months is consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes.”
Shaina Mishkin of Barron’s continues the discussion, reporting that the groundwork for this continued rise in home prices was laid even prior to the pandemic. Mishkin reports that “for the past several years, a low supply of entry-level homes combined with relatively low mortgage rates helped drive prices higher, threatening affordability for prospective first-time buyers.”
As prices continue to hit record highs, affordability will put downward pressure on demand, which could have a cooling effect on housing.
Indeed, ATTOM Data Solutions released an excellent quantitative report last week titled, Homeownership Slips Into Unaffordable Territory. According to the new report,
Compared to historical levels, 275 of the 499 counties analyzed in the fourth quarter of 2020, or 55 percent, were less affordable than past averages, up from 217 of the same group of counties in the fourth quarter of 2019 and 164 in the fourth quarter of 2017.
Prashant Gopal of Bloomberg joined the conversation, outlining that households now spend about 30% of their income on housing, the biggest share since 2008.
Being a buyer is hard in the current environment, and as investors, we need to be more cognizant than ever to not overpay for investment assets.
Housing bubble talk
Bubble talk; it’s always fun to see it popping up now and then. Wolf Richter for WOLF STREET wrote an interesting article this past week outlining the housing bubbles he sees in different high priced urban centers. Portland for instance,
Source: WOLF STREET
Portland is among over a dozen markets Richter views as in bubble territory.
In this terrible economy with 9 million to 20 million people out of work, house prices have been fired up by record low interest rates, the $3 trillion the Fed has handed the markets, the shift of working from home and not wanting to live in an apartment or condo tower, and by a dose of panic-buying.
In a more nuanced perspective, Mark Zandi of The Washington Post reports on the wealth gap in America and how the housing market contributes to that. According to Zandi, home sale and price records are similar to the housing bubble in the mid-2000s, “But this time the housing market isn’t being juiced up by out-of-control subprime two-year teaser rate adjustable mortgages and rampant home-flipping by speculators. Households purchasing homes today have high credit scores and are taking on plain-vanilla 30-year fixed-rate mortgage loans with no plans to resell anytime soon.”
Further, Zandi reports that builders have been as busy as they were during the sub-prime crisis, but this time instead of overbuilding, they are “scrambling to keep up with demand.”
Winners and losers
2020 saw a wide range of successes and challenges for different real estate sectors and businesses. Retail, food and beverage, co-working, all of these sectors took massive economic hits. But others thrived—high tech, logistics, e-commerce, and residential, to name a few.
In an interesting article this week titled, Housing Market 2020: Winners And Losers (And A Few Surprises), Natalie Campisi of Forbes continues this discussion with some interesting highlights worth noting. According to Campisi, the winners and losers go to:
🥇Winners: Mortgages rates, home sales, price appreciation, and refinancing.
😢Losers: First-time buyers and big cities.
😲Surprises: NYC real estate “may be OK.”
For the latter, Campisi reports that home prices in Brooklyn have been holding steady and outward migration only sat at 0.01% between 2019 and 2020. Further, there’s a whole cohort sitting behind the millennials who do want to live in a bustling urban environment, according to Campisi.
Similarly, The Real Deal published a similar article looking back at the biggest disasters of 2020 for the entire real estate sector. TLDR: Empty offices, vacant hotels, brick-and-mortar retail gloom, and closed restaurants. The outlet also reports that California’s wildfires and luxury condo markets across the country were serious drags on the housing sector in 2020.