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Low rates and millennials coming of age are expected to keep the pressure on.

Call it the homebuyer “Hunger Games.”

Historically low mortgage rates, the work-from-home phenomenon and demographic trends have created “insatiable” demand in the U.S. housing market, Raymond James analyst Buck Horne wrote in a research note. Home sales hit a 14-year high in 2020, according to the National Association of Realtors, which is a sign the Federal Reserve’s cut of the fed funds rate is having the desired effect for the economy. However, the imbalance of buyers to sellers has led to price increases and fierce competition that has reminded many Americans of the housing bubble in the mid-2000s.

This market is different, analysts say. “I could see this boom in housing continuing for some time, given the demand and some of the demographic issues,” said Bill Geis, head of Private Client Banking at Raymond James Financial. That includes many first-time homebuyers, who only add to the demand side of the equation in a market where the supply of homes remains stubbornly low, with a deficit in 29 states, mortgage buyer Freddie Mac reports.

Bidding war blues

Meanwhile, the stories of homebuyer frustration continue to mount. One 24-year-old software developer spent months on the hunt for a starter home in Denver. He told USA Today he was outbid eight times, and his parents agreed to loan him money to boost his chances in a bidding war. In the end, he paused his search and moved in with his parents to save up for a larger down payment. He represents a trend that has led to a majority of 18- to 29-year-olds living with their parents for the first time since the Great Depression, Pew Research Center reports. In other words, there’s another layer of pent-up need.

Listen to the full For What It’s Worth podcast episode with Bill Geis:

  

“We’ve seen an increase in demand for homes across the board,” from first-time homebuyers to affluent clients buying second homes, Geis said, “as well as a need for more and more of our clients to become cash buyers,” using bridge loans to secure the home and then mortgaging it later to gain a leg up in bidding wars. Recent figures reveal the haggling behind the scenes: Half of the home sales handled by U.S. Redfin agents have faced bidding wars over the past eight months, the real estate brokerage reported.

Normally such a hot market would call forth supply as owners seize the moment to sell, but the pandemic has slowed things down – creating an ideal situation for homebuilders.

Building our way up

“Homebuilders have rarely – if ever – enjoyed a more favorable backdrop for selling new homes,” Horne said. The Census Bureau reported that 811,000 new homes were sold in 2020, up 18.8% from the prior year, thanks in part to the Fed’s pledge to keep rates near zero. The 30-year fixed mortgage rate in turn dipped from 3.65% in mid-March to a record low 2.65% in January 2021. That has boosted buying power and allowed people to stretch their budgets to buy more expensive homes. A 1% decrease in the interest rate equals more than $30,000 saved on a 30-year mortgage for a $200,000 home.

Homebuilders seem up to the task of helping to lead the economic rebound. In December, single-family homebuilding, the largest share of the housing market, jumped 12% to 1.3 million units, government figures show. That translates into economic growth. Building 1,000 single-family homes creates around 2,900 full-time jobs and generates $110 million in taxes and fees, according to NAHB’s National Impact of Home Building and Remodeling report.

A “cycle born anew”

Demographic trends have been a steady pillar for the housing market. The peak of the nation’s largest generation – millennials – turned 30 in 2020, a time of life when many people buy their first homes. This demographic inflection point, paired with the work-from-home phenomenon, will continue to fuel robust housing activity, Raymond James analysts say.

On top of that, “social shifts (de-urbanization, de-densification, Sun Belt migration) we believe can fuel an entire housing cycle born anew,” Horne said.

It’s not all tailwinds for housing, however. The Urban Institute’s housing credit availability index hit a low in 2020, meaning borrowers with less than perfect credit are having trouble getting a mortgage. Geis called the tighter lending standards “a little bit of a surprise.”

Also, the pandemic has only brightened the appeal of aging in place for seniors, which is part of the reason for the paltry housing supply. Boomers staying put accounted for millions of homes held off the market in 2018 by some estimates.

All of this means that the American dream of owning a home, a primary method of building financial security, remains out of reach for some despite record-low rates.

Between the heightened standards for lending and the fierce competition for existing homes, homebuyers are facing challenges. Still, sales keep surging ahead. “Without question, the housing recovery since mid-May has been nothing short of extraordinary,” Horne said.

Sources: Raymond James Equity Research; the National Association of Realtors; Pew Research Center; NAHB’s National Impact of Home Building and Remodeling report; the Census Bureau; The Urban Institute; Freddie Mac analysis

Podcast recorded January 21, 2021. All expressions of opinion reflect the judgment of the analysts and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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