As the U.S. dollar continues to devalue, the setup heading into the spring housing market has never been more favorable for existing home sellers in all segments, with the exception of upper bracket homes (inner city) that are being negatively impacted by pandemic induced migration patterns.
Let’s break break down the dynamics.
Record Low Home Inventory: Thus far, the pandemic has put downward pressure on new listings which has exasterbated what were already record low levels of housing inventory. We are now heading into the 2021 spring market with only 4,900 homes, condos and lofts for sale in the Twin Cities which is 43% lower than the 8,400 units we had heading into the 2020 spring market and 38% below the previous record low from 2018.
Record Low Mortgage Rates: The Federal Reserve’s immediate response to the pandemic has been the same response they have had to all other negative economic data over the past 12 years, print more money and buy up more long term debt. During 2020, the Federal Reserve bought $1 trillion of US mortgage backed securities which sent mortgage rates (which were already at record lows) plunging to new record lows. We are starting the spring market with the national average for a 30 year fixed mortgage at 2.7%, about 23% below the 3.5% rate we had heading into the 2020 inflation cycle. Falling mortgage rates and increased mortgage liqudity spur demand by increasing affordability and by pulling some demand from the future to the present.
New Construction Price Increases: With no end to the expansion of the money supply in sight and with the reduction in productive capacities around the world from pandemic related government restrictions (more money chasing fewer goods) commodities are dramatically inflating. While there are a wide number of raw materials involved in the construction process, the commodity most specifically related to building homes is lumber. Lumber prices have tripled over the past 12 months which has forced builders to increase their base prices approximately 5% +/- to start 2021. The rising price of competing new construction is alleviating some inventory pressure in the newer home market which is helping to lift prices for existing homes that are actively competing against new construction.
The Median Home Price: We began the 2020 selling season with less favorable inventory, less favorable mortgage rates and lower construction costs, yet the median home price moved up 17% during the upward cycle. During this past winter, the median price has only corrected 4.4% from $315K to $301K in February which is where we begin the 2021 upward cycle. Given that the current setup is even more favorable, I could see the median home price rising more than 20% in 2021.
There are many home sellers who opted out of selling in 2020 because of the pandemic. If enough of them choose to sell in 2021, that additional inventory could cool down the rate of inflation but even with that extra inventory, I forecast the median home price in the Twin Cities will gain at least 15% in 2021, likely pushing above the $340k level.
Home Builder Confidence: Over the past three months, the NAHB housing market index has fallen marginally from 90 to 84. Home builders site affordability concerns from inflating construction costs as the primary concern. Here is a link to the data.
That concludes our Twin Cities housing market insight for February of 2021. Please don't hesitate to reach out to us if you would like to go more in depth on a particular market segment or dive into the current fair market value of a property you own or manage.
By Nick Leyendecker, Co-Founder | Broker | REALTOR®