Buyers hoping for more homes to choose from may be in luck as housing inventory begins to rise. Many experts agree – new sellers listing their homes is great news for buyers and the overall market.
Although the supply increases are modest, more homes means more options for buyers. A rise in inventory may also help slow the price gains we’ve seen recently and could be a sign of good things to come.
If you’re searching for a home, rising inventory is welcome news. Let’s connect today to discuss new listings in our area.
CoreLogic’s newly released Homeowner Equity Report for the first quarter of 2021 shows U.S. homeowners with mortgages (which account for roughly 62% of all properties) have seen their equity increase by 19.6% year over year, representing a collective equity gain of over $1.9 trillion, and an average gain of $33,400 per borrower, since the first quarter of 2020.
While the coronavirus pandemic created economic uncertainty for many, the continued acceleration in home prices over the last year has meant existing homeowners saw a notable boost in home equity. The accumulation of equity has become critically important to homeowners deciding on their post-forbearance options. In contrast to the financial crisis, when many borrowers were underwater, borrowers today who are behind on mortgage payments can tap into their equity and sell their home rather than lose it through foreclosure. These conditions are reflected in a recent CoreLogic survey, with 74% of current homeowners with mortgages noting they are not concerned with owing more on their home than it is worth within the next five years.
“Homeowner equity has more than doubled over the past decade and become a crucial buffer for many weathering the challenges of the pandemic,” said Frank Martell, president and CEO of CoreLogic. “These gains have become an important financial tool and boosted consumer confidence in the U.S. housing market, especially for older homeowners and baby boomers who’ve experienced years of price appreciation.”
“Double-digit home price growth in the past year has bolstered home equity to a record amount. The national CoreLogic Home Price Index recorded an 11.4% rise in the year through March 2021, leading to a $216,000 increase in the average amount of equity held by homeowners with a mortgage,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This reduces the likelihood for a large number of distressed sales of homeowners to emerge from forbearance later in the year.”
Negative equity, also referred to as underwater or upside down, applies to borrowers who owe more on their mortgages than their homes are currently worth. As of the first quarter of 2021, negative equity share, and the quarter-over-quarter and year-over-year changes, were as follows:
Quarterly change: From the fourth quarter of 2020 to the first quarter of 2021, the total number of mortgaged homes in negative equity decreased by 7% to 1.4 million homes, or 2.6% of all mortgaged properties.
Annual change: In the fourth quarter of 2020, 1.8 million homes, or 3.4% of all mortgaged properties, were in negative equity. This number decreased by 24%, or 450,000 properties, in the first quarter of 2021.
National aggregate value: The national aggregate value of negative equity was approximately $273 billion at the end of the first quarter of 2021. This is down quarter over quarter by approximately $8.1 billion, or 2.9%, from $281.1 billion in the fourth quarter of 2020, and down year over year by approximately $13.3 billion, or 4.6%, from $286.3 billion in the first quarter of 2020.
Because home equity is affected by home price changes, borrowers with equity positions near (+/- 5%) the negative equity cutoff are most likely to move out of or into negative equity as prices change, respectively. Looking at the first quarter of 2021 book of mortgages, if home prices increase by 5%, 195,000 homes would regain equity; if home prices decline by 5%, 260,000 would fall underwater.
Home price appreciation continues to accelerate. Today, prices are driven by the simple concept of supply and demand. Pricing of any item is determined by how many items are available compared to how many people want to buy that item. As a result, the strong year-over-year home price appreciation is simple to explain. The demand for housing is up while the supply of homes for sale hovers at historic lows.
Let’s use three maps to show how this theory continues to affect the residential real estate market.
Map #1 – State-by-state price appreciation reported by the Federal Housing Finance Agency (FHFA) for the first quarter of 2021 compared to the first quarter of 2020:As the map shows, certain states (colored in red) have appreciated well above the national average of 12.6%.
Map #2 – The change in state-by-state inventory levels year-over-year reported by realtor.com:Comparing the two maps shows a correlation between change in listing inventory and price appreciation in many states. The best examples are Idaho, Utah, and Arizona. Though the correlation is not as easy to see in every state, the overall picture is one of causation.
The reason prices continue to accelerate is that housing inventory is still at all-time lows while demand remains high. However, this may be changing.
Is there relief around the corner?
The report by realtor.com also shows the monthly change in inventory for each state.
Map #3 – State-by-state changes in inventory levels month-over-month reported by realtor.com:As the map indicates, 39 of the 50 states (plus the District of Columbia) saw increases in inventory over the last month. This may be evidence that homeowners who have been afraid to let buyers in their homes during the pandemic are now putting their houses on the market.
We’ll know for certain as we move through the rest of the year.
Some are concerned by the rapid price appreciation we’ve experienced over the last year. The maps above show that the increases were warranted based on great demand and limited supply. Going forward, if the number of homes for sale better aligns with demand, price appreciation will moderate to more historical levels.
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“Today’s data, showing a decline in housing starts in April, is discouraging at first glance. America is facing an epic housing shortage and more homes need to be built. The monthly data can be volatile, but the overall underlying trend is still on the upside. The year-to-date figures in 2021 for housing starts were 1.59 million units (annualized pace) compared to 1.38 million in 2020, a 15% gain. More importantly, single-family housing starts also declined in the latest month but were up 26% on a year-to-date basis.
More housing inventory will reach the market in a few months, certainly by autumn, because of the upward trend in home construction. In addition, the mortgage forbearance program will also steadily wind down, leading to further inventory. Moreover, the progress in vaccination among elderly homeowners will lead to normal life activity, including home sales that had been postponed since the onset of the pandemic.
Housing starts are projected to reach 1.6 million for all of 2021 and rise further to 1.7 million in 2022. This would mark the highest home construction activity in 15 years. It is not an overproduction, but rather an attempt to compensate for multiple years of underproduction that led to the current housing shortage.”
Experts Say Home Prices Will Continue to Appreciate
It’s clear that consumers are concerned about how quickly home values are rising. Many people fear the speed of appreciation may lead to a crash in prices later this year. In fact, Google reports that the search for “When is the housing market going to crash?” has actually spiked 2450% over the past month.
“One of the most noteworthy things that came up in Inman’s conversations with agents was that every single one said they’ve had conversations with clients about whether or not the market is heading into a bubble.”
To alleviate some of these concerns, let’s look at what several financial analysts are saying about the current residential real estate market. Within the last thirty days, four of the major financial services giants came to the same conclusion: the housing market is strong, and price appreciation will continue. Here are their statements on the issue:
“Strong demand for housing looks sustainable. Even before the pandemic, demographic tailwinds and historically-low mortgage rates had pushed demand to high levels. … consumer surveys indicate that household buying intentions are now the highest in 20 years. … As a result, the model projects double-digit price gains both this year and next.”
“Homebuyers—interest rates are still historically low, though they are inching up. Housing prices have spiked during the last six-to-nine months, but we don’t expect them to fall soon, and we believe they are more likely to keep rising. If you are looking to purchase a new home, conditions now may be better than 12 months hence.”
“Unlike 15 years ago, the euphoria in today’s home prices comes down to the simple logic of supply and demand. And we at Morgan Stanley conclude that this time the sector is on a sustainably, sturdy foundation . . . . This robust demand and highly challenged supply, along with tight mortgage lending standards, may continue to bode well for home prices. Higher interest rates and post pandemic moves could likely slow the pace of appreciation, but the upward trajectory remains very much on course.”
“There are reasons to believe that this is likely to be an unusually long and strong housing expansion. Demand is very strong because the biggest demographic cohort in history is moving through the household-formation and peak home-buying stages of its life cycle. Coronavirus-related preference changes have also sharply boosted home buying demand. At the same time, supply is unusually tight, with available homes for sale at record-low levels. Double-digit price gains are rationing the supply.”
If you’re concerned about making the decision to buy or sell right now, let’s connect to discuss what’s happening in our local market.