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High home prices and low inventory likely to persist in 2021

Homebuyers are likely to face higher prices and a continuing inventory crunch in 2021, First American Chief Economist Mark Fleming has predicted. Demand for homes has been high since April, fueled by historically low mortgage rates that helped offset the initial impact of the pandemic.

However, the Real House Price Index (RHPI) increased for a second consecutive month in September, indicating a decline in affordability as price appreciation surpassed the added buying power made possible by low mortgage rates. “Rapid nominal house price appreciation has finally outpaced the house-buying power benefit from historically low mortgage rates,” Fleming said.

“The low rates have helped fuel the surge in demand since April in a housing market that is desperate for supply, which is Econ 101 for faster house price appreciation that out-competes rising house-buying power.” Fleming labeled the housing supply shortage “historic.”

Inventory turnover was low before the pandemic, then dropped sharply in April. Average inventory stood at 1.65% in 2019. In April, the average inventory fell to 1.4% and dropped to 1.3% in the following months. That translates to 130 homes in every 10,000 are for sale. For context, the average monthly stock of homes for sale has hovered around 2.5% since 1991. Homeowners are staying in their homes longer, lowering the availability of existing homes.

The seasonally-adjusted months’ supply dropped to 2.5 months in October, a figure Fleming described as historically low. Homeowner occupancy is at a historically high 10.5 years. “Ultimately, rising tenure length means there are fewer homes on the market and as demand has surged the competition among home buyers for the small amount of homes for sale drives prices up,” Fleming said.

There are bright spots. Mortgage rates remain below 3%, increasing the buying power for  potential buyers with steady incomes. Homebuilders are also responding to the supply shortage. Housing starts rose 14% year-over-year in October. Fleming said the supply dynamic is unlikely to change quickly, as the housing supply has been under-built for more than a decade.

“Mortgage rates are expected to remain low for the foreseeable future and Millennials will continue forming households, keeping demand robust even if income growth moderates,” Fleming said. “Despite the best intentions of home builders to provide more housing supply, the big short in housing supply will continue into 2021 and likely keep house price appreciation flying high.” The post High home prices and low inventory likely to persist in 2021 appeared first on Boston Agent Magazine.

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