Even if you’re a thrill seeker, the scariest roller coaster many of us have ever been on were the first five weeks into the pandemic, when demand in the U.S. housing market bottomed out, and then the following two to three months, when it began a shaky climb before culminating in purchase applications making a full V-shaped recovery by early June.
Are We About to Have Our Bubble Burst?
Now, in the first weeks of 2021, there is that same scary feeling of uncertainty.
Some are predicting a bubble, likely to cause a housing crash in 2021, citing as evidence the moderation of some housing data metrics that typically follow parabolic increases, as well as concerns with the percentage of homeowners who have taken forbearance due to the pandemic, but will be still unable to pay when that money and property taxes come due, and also a significant decrease of people who are able to buy.
But others, such as HousingWire, are saying that context is key, and “it takes more than the housing data moderating back to trend to crash the market.”
According to HousingWire, home prices would need to fall 68% to get back to the interim low, and considering where we are now, with home prices rising at the “too-fast” rate of over 6%, they claim it seems unrealistic at best.
That outlet’s theory is that since 2020 was by no means typical, including for the housing market, projections need to take into account how significant the effect of the COVID crisis was to this metric – meaning, that typical indicators cannot be relied on, because of this hugely influential outlier.
On Jan. 5 the 10-year Treasury yield broke 1%, and on Jan. 6 the 10-year remained above that line in the sand. HousingWire claims that 10-year yield milestone is important to keep in mind when looking at the housing data in the coming months, and while housing data dipped in late 2020, now it should be moderating to a normal trend.
Something to look out for however, are noticeable hits on forward-looking indicators of demand, like the MBA purchase applications, however without that indicator, we shouldn’t interpret the moderation of housing sales metrics as anything other than going back to trend.
For 31 straight weeks, from the end of May to before Christmas, purchase applications were trending at over 20% growth year over year. This was due to pent up demand that was stalled during the nine weeks in 2020 when purchase applications went negative year over year.
This was just pent up demand, and you shouldn’t expect that trend to continue – growth with normalize, but not continue at that high rate, and HousingWire predicts a 1%- 11% growth in purchase applications, year over year. Anything above 12% growth early in the year would just translate into making up for lost demand still from last year.
What about for later in the year, and even beyond 2021? What will happen when society goes back to “normal?”
The Remote Work Revolution is Bigger Than We Think
While the rise of telework may seem sudden, that doesn’t mean it’s a fad, or something that is going to shrink away as we get back to “normal.”
In many ways, we can never go back to 2019. Remote work, and all that comes with it, will be one of those ways.
Nearly a year into the pandemic, as remote-work continues, a phenomenon known as “Zillow tourism” has taken hold – where people’s escapism doesn’t mean pining for bright lights and the big city, but sitting in cramped apartments, looking to see how far their money could go in cities like Boise, Fort Myers, and Cincinnati.
An article published this month in The Atlantic, considers this phenomenon as Americans test the necessity of living where they work.
During this past year of pandemic, Zillow searches have soared, according to Jeff Tucker, the company’s chief economist. “We’ve seen online searches for Boise, Phoenix, and Atlanta rising fastest among people who live in coastal cities, like Los Angeles and New York,” he told The Atlantic.
Higher search volumes on Zillow have coincided with a booming housing market in the South and the West, as rents fall in expensive coastal cities.
There have always been trends, rises, falls, etc in the housing market, but this is different – this is a sea change for humanity.
For most of human civilization, we’ve lived where we’ve worked. More than 90 percent of Americans drive to work, and their average commute is about 27 minutes. With the invention of fast travel and the internet that cord has stretched farther out, but never before have we been so completely untethered from a physical office space.
The housing market is booming in the South and the West, while rents are falling in expensive coastal cities. It’s no longer culturally or socially weird or rude to request a Zoom link for a meeting – now, it’s second nature to provide it.
The Types of Workers and Businesses You’ll See Affecting House Hunting
According to The Atlantic, we’ll see a rise in four different ways remote work will boom or bust local economies:
The Supercommuter: The worker who doesn’t want to completely sever their ties to the physical office, but just get an extension cord. This person will live farther out, and only go into the office as-needed, maybe a couple of times a week – or month.
Sayonara, Superstar Cities: The migration trends out of large coastal cities like Manhattan and the Bay Area in 2020 isn’t fleeting, but an indicator of a bigger exodus ahead.
According to U-Haul’s annual review, California lost more people to out-migration than any other state in 2020, and the five largest states in the Northeast—New York, Pennsylvania, New Jersey, Massachusetts, and Maryland—joined California in the top 10 losers. Rents have fallen fastest in “pricey coastal cities,” including San Francisco, Seattle, Los Angeles, Boston, and New York City, according to Apartment List. Zillow data also show that home values in New York, San Francisco, and Washington, D.C., are growing below the national average.
If they continue, these migration trends could be an indicator of longer-term trouble for cities such as San Francisco and New York, where municipal services rely on property taxes, sales taxes, and urban-transit revenue.
Those revenue losses would have greater implications on overall city services, which could further exacerbate the problem.
New City-Dwellers: If you like your real estate glass half full, it’s possible that as the pandemic pushes thousands of wealthier groups out of coastal cities, and thus reducing the cities’ rent and housing costs, the lower costs could attract a new generation of working and middle-class families to move back into the city, which leads to regrowth. However, both the optimistic and pessimistic cases would likely involve a difficult period of transition.
The New Manifest Destiny. Home values are declining in major cities, but they’re rapidly growing in other areas: major Sun Belt metros such as Phoenix, Nashville, and Austin, and midwestern cities, such as Cincinnati, Cleveland, and Indianapolis.
The moving trends and housing prices are hot in the Southeast, which accounts for 13 of the top 25 cities with the fastest growth in U-Haul migration in 2020, and the top three cities for inbound moves were all in one state: Florida.
What this means is that rather than having just a handful of wealthy cities flourishing with education, art and growth, we can have dozens as remote work sprinkles high-income workers throughout the country. Thousands of high-income workers moving to lower-income metros in the Midwest and the South could stimulate local job creation and raise local incomes.
Open possibilities for the next business boom. When you think back to big tech hubs of today – Silicon Valley and Seattle, just a few decades ago, they were nowhere near the scale they’re at today.
Sometimes, a meteoric rise like that only takes one person moving there.
“If you look at Seattle in the 1970s, there was not much high tech, and Boeing was shedding jobs by the thousands,” said Enrico Moretti, Economist, in The Atlantic article. “But then this random guy named Bill Gates, who started this small company called Microsoft in Albuquerque, New Mexico, decided to move his headquarters to Seattle to be closer to his family and the family of his co-founder, Paul Allen.”
Following that theory, the current American migration patterns are akin to a strong wind blowing seeds all around the country, with the potential to grow any of these cities into industry hives.
Today, the innovation economy is unevenly distributed. Three states—New York, Massachusetts, and California—account for three-quarters of all venture-capital investment in the United States. But imagine if one of the companies moving (for example, as Elon Musk claims Tesla is to Texas) takes off, or one of the people moving to be closer to their families, creates a new hub of industry like a Wall Street South in Miami.
Final Verdict: Crash or Boom?
Like 2020 taught us all too well, you can’t predict everything. However, our analysis tells us that there is still a lot of change and pent up demand coming that will lead to a continued boom in the real estate market.
However – there is a tough road ahead for many areas that are currently declining, like coastal cities, as they go through a transition period which could last for years. That means in places like, New York, Los Angeles, San Francisco, and even Chicago, it could be years before prices reach their pre-pandemic numbers.
However, for burgeoning cities like Austin, Boise and Ft. Myers, as well as many others that are seeing growth right now, it seems like those trends will continue even as coronavirus begins to slowly fade away.
It’s likely we will even see a huge boom in many areas that have been relatively steady up until this point, or seen slow growth – with American’s able to work anywhere, it seems like the whole country is wide open for the next tech boom city, or clean energy capital.
Do you or your clients need help moving? Contact Suddath so we can help get you where you need to go.