Residential Economic Issues & Trends Forum Update 2020

Twice a year, the National Association of Realtors holds a forum on economic issues and trends. This year, we entered the unknown and I have broken down the session for you.

2020 gave us a new President for the upcoming term. I will talk a little about Joe Biden's plan pertaining to real estate matters and then I will dive into the trends we are seeing this year compared to previous years.

Under Joe Biden, we can expect to see:

> Homebuyer Tax Credit of $15,000 paid at the Closing table (income-limited)

> 1031 Tax Exchange will be considered for removal

-This can negatively effect the supply of homes due to land owners unwilling to sell their vacant land due to having to pay excessive Capital Gains tax. This will hurt the average Joe when it comes to purchasing homes since there will not be enough homes and currently isn’t now.

> Fannie Mae and Freddie Mac’s role will not be privatized under a Joe Biden Presidency. The CEO of Freddie Mac recently came out and publicly announced his resignation.

> We will see new Appointments to the Federal Reserve and anticipate interest rates to remain low during the presidency.

>Possible Nationwide lock down. These lockdowns have been devastating for state’s economies. The states that opened back up quickly have recovered the most economically and in the employment sector, while many states like Pennsylvania are slow to recover. In relation to job growth, we still need another 10 million jobs to get us back to the peak prior to the pandemic. Oklahoma is at a level of -5.1% while states like California sit at -8.5%. Idaho is at the lowest unemployment rate at -0.7% as of September 2020.

Due to major lockdowns, globally we have seen MAJOR declines in gross domestic product (GDP). China is the only country to see +2% gains while America sits at -5%. Other countries are in the 4-10% ranges, Britain being the most effected due to a second lockdown and Brexit anticipated for the end of 2020. American GDP is lower currently, but still higher than 1 year ago thanks to the stimulus checks.

Inflation is currently up, we are seeing Used Car sales increase by 11% from last year, while new car sales are only at +1%. Other items that are seeing inflation include food prices, pet services, and cable services. College Tuition is only slightly higher at .6%, whereas we would usually see it in the 3’s or 4’s. This is due to less students wanting to start school during the pandemic. Clothes, car insurance, lodging away from home, gasoline and airlines are seeing a negative change from last year. Airfare is down significantly at -20% due to this over-capacity in this current environment.

Now on to trends we are seeing in the housing market.

Existing home sales in 2018 to most recent, show a significant drop in home sales, but as soon as the lockdowns were lifted, we saw a rush of people purchasing existing homes in addition to new home sales. New home construction is seeing a 40% gain from the pandemic lockdown.

This winter will most likely be one of the best home sales activity compared to past winters. Mortgage applications are up 20%, making for plenty of buyers in the pipeline to purchase homes. In 2018, we saw home sales start to retreat due to higher mortgage rates from higher home prices First graph below). However, the housing market is strong in 2020 due to the declines in mortgage rates to an all-time low balancing out the higher home prices for now.

Graph A
Graph B

During the lockdowns(March-May) we are saw the percentage of income for mortgage payments decrease(Graph A), but then quickly rise with the all-time low interest rates (Graph B). This is where home prices began to get out of control. Some cities are seeing 7% increases (More in some areas) in home prices. This contributes to an increase in mortgage prices. We need mortgage rates to remain stable.

Some affordability challenges have been alleviated from the falling mortgage rates, however, if we continue to see housing prices increase, it will begin to chip away from affordability. The National Association of Realtors is seeing home price appreciation increase during the pandemic due to multiple offer situations. US Housing Equity is at an all-time high, the graph below shows the gains in equity as purple, while the orange line shows the decrease in outstanding mortgage debt.

In the next graph, you can see the cumulative equity gained from the purchase of home in a particular year compared to other years. I purchased my home in 2010 and can attest that it has seen a $100k gain in equity within the last decade. This is a sizable accumulative equitable gain for home buyers. This is why we say investing in Real Estate can break the cycle of poverty. It an asset that appreciates over time and you share that wealth with future generations.

We are seeing a higher homeownership rate boost in African American households and Hispanic households than year previously which is great news. We are at an all-time low for housing months supply. We like to see it at 6 months, but we are seeing it at 3 and 2 months supply.

We need to pursue home building measures in any way possible. This is where the 1031 tax exchange incentive comes in. Vacant Land Owners are able to sell their land to Home Builders, opening the market to more supply.

Problems homebuilders are facing is the increased cost of softwood lumber. We need a reduction in tariffs for Canadian lumber. We need to see more people in the restaurant and hospitality industry move to the construction industry. This can be accomplished through training programs. The graph below shows the steep incline.

Office leasing activity has decreased due to people being able to work from home. Half of the people who work from home are still working from home. This has been made possible by the improvement of high speed internet services. Employees from expensive cities are moving to cities with more affordable housing due to employees being able to work from home. USPS shows a big change in where people are moving in and out.

Take Aways

Gong into 2021, I believe we will see Oklahoma's property values increase. This will allow existing home owners to cash out on their equity and purchase homes so we will see a good overturn of existing homes, but still situations under $200,000 will face multiple offer situations, driving up the value. Our winter market will continue to be busy in addition to our spring market unless a significant lock down occurs. Now is a great time to purchase a home, the graphs indicate that no matter when you purchase a home, the sooner the better so you can reap from the equity years down the road. If you don't start now, when? Best to take advantage of the down payment assistance programs or wait until Biden's $15,000 DPA program begins.

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