“Advantage goes to…”
The real estate market, unlike some other investment assets, acts in cycles. While the stock market has been notably unpredictable, the real estate market has historically been a bit more formulaic — it switches between sellers and buyers markets.
A seller’s market is one in which goods (homes) are scarce and allows sellers to keep prices high, while a buyers market is the inverse and creates less favorable conditions for sellers. One way to tell which phase we’re in is by looking at average days on market for sold properties, which would give some insight into the supply/demand of the market. The equilibrium is just about 6 months. The rule-of-thumb is that if homes are staying on the market less than 6 months, we’re in a seller’s market.
Conversely, if it’s more than 6 months, it’s considered a buyers market. Famous economist Homer Hoyt studied the real estate market extensively and found that it typically cycles over a period of 18 years. His studies showed that there’s usually a 7-8 year gradual rise, followed by a 7-8 year rapid rise. Figuring that our last housing recession was in 2006, that would leave us right in the middle of a period of immense growth.
However, if there is one word to describe 2020, I would say one stands out the most: uncertain. While the decade’s turn was seemingly an opportunity for growth for many, it ended up being one of the most unprecedented years in the last century. In March, the stock market saw its most historic drop, while the Bureau of Labor Statistics reported a monstrous total of 22 million jobs lost (refer to figure 2), at one point during the pandemic.
The real estate market has also been affected immensely, but for better or worse? As you can imagine, home sales plummeted at the onset of the pandemic. Not only were people uncertain of how it all affected the value of their homes, but they were also timid to let strangers walk through it. Nevertheless, not too long after that, as discussed in last week’s article, “Are people moving to Florida?“, Americans started rethinking their space at home, and the data proves it.
“While the decade’s turn was seemingly an opportunity for growth for many, it ended up being one of the most unprecedented years in the last century. In March, the stock market saw its most historic drop, while the Bureau of Labor Statistics reported a monstrous total of 22 million jobs lost.”
The census bureau data shows that new home sales jumped 43% from August 2019 to August 2020. Additionally, Realtor.com® released research that showed some shocking statistics about the largest generation in US history; millennials. 63% of which plan to buy a home within the next year because of their ability to work remotely.
This shift happened for a few reasons. Firstly, renters and home-buyers are considering lifestyle. With working-from-home becoming one of the significant changes we’ve seen in the last year, people want more space. Instead of taking a staircase up to the apartment, they want a backyard where they can take a breather during their lunch break. Which might explain the decrease in demand for apartments. For example, New York City saw a 46% drop in sales during Q3 of 2020, while Florida saw a significant increase in Single Family home sales. Secondly, we can look to the low-interest rates as an explanation.
At the time this article was written, we are seeing record-low interest rates below 3.5%. These rates have lowered entry barriers for first-time home-buyers, making mortgage payments considerably closer to rent payments than ever before.
Lastly, the pandemic presented an unparalleled opportunity to save. With restaurants closing down for a portion of the year and fears of the virus, people decided to stay in, which meant spending less money on shopping, eating out, etc. The frugality gave people the ability to save up for a down payment.
“At the time this article was written, we are seeing record-low interest rates, below 3.5%. These rates have lowered entry barriers for first-time homebuyers, making mortgage payments considerably closer to rent payments than ever before.”
All of that is to say that Homer Hoyt seemed to be accurate in his assessment of real estate cycles. We’re seeing parabolic growth in America’s interest to buy homes, despite the “new normal”. Zillow predicted that we are “expected to peak this fall then taper off through 2021, though still staying above pre-pandemic levels.” Evidently, the pandemic has had a positive impact on the real estate market and leaves us in the middle of an unrivaled seller’s market, while also giving homebuyers a special opportunity to find their new home.