Certainly exacerbated by the pandemic, this housing crisis is all about one thing: supply
A harbinger of the 2021 market is tight listing inventory, low interest rates, and high buyer demand continuing to drive momentum.
“Insatiable buyer demand” is keeping inventory scarce as house hunters try to outmaneuver and outbid each other, according to reports from Northwest Multiple Listing Service (NWMLS). Its statistical summary for the end of 2020 showed strong activity throughout the holiday season with double-digit increases in new listings, pending sales, closed sales, and prices.
Measured by months of inventory, there is only about two weeks of supply (0.53 months) overall. Only five counties had more than a month of supply, well below the four-to-six months of supply used by housing analysts as a gauge of a balanced market.
So how did we get here and why aren’t sellers taking advantage of the current market?
New Zillow data reveals the pandemic's influence on why homeowners aren't selling in a hot seller's market.
- About a third of homeowners who are considering selling in the next three years cite life being too uncertain right now (34%) and financial uncertainty (31%) as reasons they aren't selling.
- Nearly 40% of these potential sellers say they anticipate a higher sale price if they wait.
- A quarter of potential sellers say they aren't selling because of COVID-19 health concerns, while 6% cite taking advantage of mortgage forbearance programs as a reason they are holding off.
Additionally, builders still aren’t building as many homes as they used to.
In fact, they’re not even building enough homes to meet demand, or enough to replace homes that are lost each year to demolition, disasters, or other causes.
Javier Vivas, Director of Economic Research for Realtor.com
“The dynamics of increased competition and buyer frustration are unlikely to change…In fact, the direction of the trend is pointing to a growing mismatch between the pool of prospective buyers and existing inventory.”
Supply and demand are fundamental
Supply and demand are two of the most basic components of economic theory. Too much supply, and products become commodities with falling prices. Too much demand, and scarcity creates bidding wars which drive prices higher. This, in an overly simplistic way, describes what’s happened over the last decade in the housing market.
On the Supply Side: builders still aren’t building as many homes as they used to. In fact, they’re not even building enough homes to meet demand, or enough to replace homes that are lost each year to demolition, disasters, or other causes.
It’s no surprise that a big part of this shortage is due to builders staying on the sidelines instead of gearing up production to meet demand. But what might be surprising are some of the other factors contributing to this lack of supply, and the impact these factors are having on prices, sales, and the housing market in general.
Unsurprisingly, during the economic and housing crisis of 2007-2011 homebuilders did the only logical thing they could do under the circumstances: they essentially stopped building new homes. Somewhat more surprisingly, ten years later – and after the longest sustained period of growth in the history of the U.S. economy – builders still aren’t building as many homes as they used to.
Existing home inventory also missing, however.
The lack of activity by new homebuilders since the end of the Great Recession has been an obvious, very visible cause of the low inventory of homes for sale. But even in a healthy, fully functional housing market, new home sales only account for 10-20% of all sales – the other 80-90% of sales are existing homes. And those existing homes have been largely missing from the sales inventory.
Nearly 40% of homeowners considering selling in the next three years say they anticipate a more favorable sale price if they wait, suggesting they don't feel pressure to list now in order to get a good price. Median sale prices are at all-time highs, up nearly 11% year-over-year for 2020. Seller optimism has also rebounded; a recent Fannie Mae survey finds a majority (56%) of people think it's a good time to sell, compared to 29% who felt that way in the spring.
"Potential sellers are likely correct that home prices have yet to reach their peak, and in the long run prices tend to rise, so there's no clear 'right time' to sell," says Zillow senior economist Jeff Tucker. "Homeowners who feel life is uncertain right now may think they can still get a strong price if they delay selling until they have more clarity. The catch is that waiting to sell may raise the cost of a trade-up. The current near record low mortgage rates, which make a trade-up more affordable on a monthly basis, are not guaranteed to last."
More than 30% of homeowners (31%) considering selling in the next three years say their plans are paused because they are concerned about finding or affording a new home. A 2020 Zillow report finds 63% of sellers are also buyers; these dual-track homeowners may sell their home for top dollar only to enter an extremely competitive buyer's market where homes are going under contract in just a matter of days.
Near-record low mortgage interest rates are giving buyers a leg up, but homeowners are also taking advantage of those low rates with 15% citing a recent refinance as a reason not to list their home for sale.
Virus safety was one of the least-frequently cited concerns among homeowners who have been hesitant to put their home on the market. Zillow's survey found 25% of potential sellers said they weren't selling because they were concerned about their household's health and safety during the pandemic. The rapid adoption of real estate technology such as 3D Home virtual tours and video tours has allowed many home shoppers to limit in-person showings. Those digital tools coupled with new safety standards and cleaning protocols may be making more would-be sellers feel comfortable during the pandemic.
On the demand side: The Seattle-area economy is currently booming, with high-paying tech jobs leading the way. People are moving to King County in record numbers. While the trend toward rising home values is most pronounced within King County and the Seattle metro area, it’s occurring statewide as well. In fact, the real estate market in Washington set records during 2020 where it led or was near the top of the nation in appreciation for 12 consecutive months.
Builders are trying to respond to the pent-up demand. Seattle and the Eastside are seeing a growing number of infill homes in the core areas, some on lots as small as 3,000 square feet. Builders are doing smaller releases and setting offer review dates, and then determine price ranges for the next phase.
What used to be an affordable way to build homes has now become more mainstream for both smaller and larger builders. Historically, infill homes did not get the same return as homes built in large community plats, but now they're realizing similar price points as more people continue to flood the market and the battle for scarce inventory heats up.
There is an incredible dearth in the supply of housing compared to the high demand leading to high housing costs. Yet while many openly express concerns and cry out for the need for affordable housing, many of those same voices push for building moratoriums to slow development.
Simply put…. You can’t have your cake and eat it too. There are a projected two million (2,000,000) more people moving to Western Washington in the next 10 years. That’s like adding the cities of Redmond, Issaquah and Sammamish to the area every single year for 10 consecutive years.
The only way to achieve more affordable housing for everyone is to build more homes!
Yet a moratorium is a very purposeful manipulation of the supply curve in the wrong direction. While the housing market is more complicated than supply and demand alone. The complex nature of the housing market and the real estate development industry does not negate the fundamental role supply and demand plays. Those calling for a moratorium while simultaneously insisting it would not have negative effects either deny this fundamental role of supply and demand akin to denying the realities of global warming or are simply ignoring it for political and rhetorical points at the expense of the very bloc of residents they purport to protect.
Concern is understandable, but bad policy is not.
No one denies that housing prices are high—so high in fact that they are out of reach of the middle-class. We can all agree that we need to find ways to ensure a reliable stock of housing is available to everyone but supply and demand is a fundamental part of our market economy. Whether you want to believe in supply and demand or not, its effects are pervasive across all sectors. Housing is no exception. A moratorium only ensures scarcity, making real estate investment that much more lucrative, continuing to lead to increased prices and likely even more condo conversions and evictions.
At month end of December 2020, there were 4,732 total active listings system-wide in the MLS database, which encompasses 25 counties. That’s down 44% from a year ago when the selection included 8,469 listings. Measured by months of inventory, there is only about two weeks of supply (0.53 months) overall. Only five counties had more than a month of supply, well below the four-to-six months of supply used by housing analysts as a gauge of a balanced market.
With just over a two-week supply of homes on the market, last month maintained the extraordinary market we have seen all year. For demand and supply to remain this out of balance for this time of year is incredible, and this trend is likely to continue well into spring and summer of 2021.
NWMLS director Jason Wall, designated broker at Lake & Company Real Estate, said 2020 was unusual “and it ended in the same way – surprising.” Noting the market typically slows during the holiday season, Wall said, “This year, with little to no travel and not much else attracting homebuyers’ attention, many of them remained very active in the market. Homebuyers that hoped to take advantage of less competition in a relaxed housing market instead found the same competitive market.”
NWMLS director Mike Larson, president/designated broker at ALLEN Realtors, described the market as “the best of times for sellers and a very challenging time for buyers. Sellers can be picky because there are almost always multiple offers. Buyers are being forced to add value to their offers in ways other than price.” Examples he cited included shorter contingencies, closing date flexibility, higher earnest money deposits, and agreeing upfront to pay the difference if a property’s appraised value is lower than the sales price.
Home prices continue to rise. For the 9,008 sales of single-family homes and condos that closed last month, prices jumped nearly 12.2% from a year ago, increasing from $435,000 to $488,000. Only three counties (Ferry, Okanogan, and San Juan) reported year-over-year price drops, while nearly all other counties had double-digit gains, according to the NWMLS report.
Single family homes accounted for most of the price escalation. For the 7,848 closed sales of this property type, prices increased nearly 12.9%.
“Housing market activity is truly off the charts,” exclaimed J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. He described activity for new listings going under contract as “frenzy-level,” fueled by low interest rates and a huge backlog of buyers.
“Now that the holiday season is over, local housing markets will see a surge of buyers entering the market in 2021,” Scott predicts. He also reported those who can work from home are moving to lifestyle/destination markets further outside city centers.
“COVID has not slowed the demand for housing. In fact, it has driven it up as people search for the perfect work from home location,” said Frank Wilson, Kitsap regional manager and branch managing broker at John L. Scott Real Estate.
“The 2020 housing market was remarkable for many reasons, not the least of which was its extraordinary resolve through the COVID-19 pandemic,” stated Windermere Chief Economist Matthew Gardner, adding, “Who would’ve thought back in April that we would be ending the year with strong increases in both sales and prices?”
Deely, Larson, Rebhuhn, and Wall expect activity in 2021 to resemble 2020:
• “Demand driven by the continued growth of the tech and biomedical sectors and our high quality of life with access to vast marine and alpine activities will continue to drive prices up and growth toward the suburbs.” ~ John Deely
• “So much of what is driving the market is interest rates and I don’t see the Fed raising rates in the foreseeable future. I expect 2021 to be much like 2020.” ~ Mike Larson
• “2020 real estate activity ended with a bang, indicating that 2021 will be an explosive year for listings and sales.” ~ Dean Rebhuhn
• “I expect the first half of 2021 will be very similar to last year: low interest rates combined with low housing inventory resulting in a very active and competitive market. Multiple offers and waived contingencies will likely be the norm as we roll into the new year.” ~ Jason Wall
Economist Gardner echoed some of those sentiments, saying, “As we move into 2021, I expect continued strong demand from buyers, but unfortunately, the likelihood that there will be any significant increase in inventory is slim. As a result, I believe prices will continue to rise, which is good news for sellers, but raises concerns about affordability. This, combined with modestly rising mortgage rates, could end up taking some steam out of the market but overall, I expect housing to continue being a very bright spot in the Puget Sound economy.”