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This is the fifth installment of our economist Q&A series, as we work to answer the top 2021 housing market questions for our HW+ members. Every Tuesday in December, HousingWire interviewed a top economist in the HW+ Slack channel. In each Q&A, we attempt to bring clarity to the top questions around housing supply shortages in 2021, the future of foreclosures and the future generation of homebuyers.
In this installment, HousingWire interviewed Mark Fleming, chief economist at First American, on his forecast for next year. This interview has been lightly edited for length and clarity.
HW: In your commentary, you say the speed of the housing recovery was surprising, but the underlying factors that created it were not. Why is that?
Mark Fleming: First, I just have to say that I was/am amazed at how well the housing market fared this year, considering! That’s a testament to the hard work of many of you on this chat…so thank you! For what turned out to be an amazing 2020, despite the pandemic
I think I was surprised because I didn’t realize how pandemic-proof the market really was when it all got started in March. But, we quickly realized that the potential homeowner was going to be much less impacted by the recession, and at the same time, those young Millennial buyers were going to benefit from even lower mortgage rates.
Strong demographics, low rates, and then no housing supply…a recipe for market success! These were all in place before the pandemic…they just proved so resilient TO the pandemic!
HW: When you talk about pent-up demand you reference Millennial homebuyers. Are we starting to see any interest in home buying from Gen Z?
Mark Fleming: Gen Z? We need to first ride the wave of Gen Y.
But more seriously…not much yet. What Millennials showed was that eventually they wanted to become homeowners (in their early 30’s). There has been a pretty steady progression in waiting for homeownership by generation.
Silent- early 20’s
Baby boomers- mid 20s
my generation- late 20s
Millennials- early 30’s
soooo… my guess is that Gen Z may wait even longer. They have time!
HW: What is the greatest hindrance to housing supply in the coming year, and will new supply from homebuilders help confront the current housing supply shortage in 2021?
Mark Fleming: More and more existing homeowners don’t want to sell. Here’s why.
I just locked in a 30 year fixed rate mortgage at 2.8%! Seriously!! I have a ton of equity in my home and would like to upgrade (maybe move) but there’s nothing to buy!
This is what we call the homeowner prisoners dilemma. There’s nothing to buy because nobody is selling but nobody is selling because there’s nothing to buy.
Right now, it seems fewer want to blink. Even fewer than nine months ago!! So new construction to the rescue?
But even at a million homes a year, it’s just not enough! New home sales make up only about a fifth of the total market. We just can’t build fast enough to dig out of this one. That’s why I think next year will be another year of short supply.
HW: We know housing supply is low, but is there anything that people are maybe not paying attention to when it comes to low housing stock that they should be?
Mark Fleming: Great question. It depends on where you are. Some markets aren’t as tight as others, and in different markets, different price segments are more evenly supplied than others.
For example, there’s plenty of condos in Manhattan for sale right now, anyone interested? And there’s barely anything for sale in the burbs around most major metro areas of the mid Atlantic, Northeast and California. Generally, the South and Sun Belt have much better availability, but that’s also where it’s easiest to build.
HW: You say job losses due to COVID could create headwinds next year. How much of a challenge do you foresee on this front, and could the distribution of a vaccine get rid of this obstacle?
Mark Fleming: Yes, it takes one key thing to buy a home and stay a homeowner- income! Hence, we worry when income growth is at risk such as in a recession or post the shortest recession ever like now.
The good news is that since my writing about this concern another fiscal stimulus package has been passed, and it has been proven that the last one went a long way to protecting people’s income streams and ability to pay. So, I am less worried now than say a week ago that sliding incomes would hurt potential demand or existing homeowner ability to pay.
And, of course, the vaccine is the panacea that we REALLY need to get past all of this. It is an obstacle indeed but one we can clearly see beyond now.
HW: In your article you mention that if distressed homeowners are required to resolve delinquency, given their equity buffers, involuntary sales are much more likely than foreclosure. How does that change the housing supply shortage picture for 2021?
Mark Fleming: Great question! And first I should reiterate that it is the massive amounts of equity that will protect us from a wave of foreclosure, even if many become seriously delinquent (without forbearance). While having to sell involuntarily (to avoid foreclosure) is still…. involuntary, it’s better than the alternative. It will help with the inventory issue a little bit, but it’s hard to imagine it makes a big enough dent!
In the last recession, even with lots of foreclosures, the mistake was to assume they would all appear at once in one massive tidal wave! Never really happened that way. It took time to work through it.
Involuntary sales are easier to do than foreclosures, but again, I doubt all at once. So, when we sell about 7 million homes a year, it’s hard to see enough involuntary sales to make a huge contribution at any single point in time.
HW+ Member: Any thoughts on Odeta’s recent article on homeowners equity showing declining equity in places like Houston Q2’20 vs Q2’09 posing any concerns in some local markets?
Mark Fleming: Well, they say real estate is local, so I don’t worry about some markets that have been harder hit by the pandemic – Vegas, Houston (indirectly through a drop in oil demand). But, you would have to have big declines for many months to whittle away that buffer entirely so good to be aware but no alarm bells going off…yet…
HW: Do you think home sales will subside again once the Spring home-buying season is over or will it continue throughout the year?
Mark Fleming: I think we will get back to the more normal seasonal cycle we are used to in 2021 – peaking sales in early summer with a fade into the fall and winter. 2020 was odd because there was so much pent-up demand from March and April that it extended the peak season into early fall. While I am guessing 2021 will be a strong year overall (so the levels will be high throughout the year) the “shape” of the seasonality will look more like years past.
Side note: First-time homebuyers traditionally exhibit a lot less seasonal buying patterns – no kids to get enrolled in school. No worries about WHEN they buy.
HW: What is the one factor that could make you change your 2021 forecast?
Mark Fleming: Easy – we don’t kick this pandemic! It’s trite to say it but really true – the economy is greatly affected by the pandemic – voluntary or involuntary staying at home cuts consumption demand. And consumption is a BIG part of this economy. We are all assuming we will be able to get back to normal life by the middle of next year and consumption will return. A healthy economy makes for a healthy housing market, so the flip to that is the risk. Of course, we did just prove in 2020 that we can do well EVEN in an unhealthy economy. But, just like the virus, we aren’t sure how long immunity lasts!
HW: Do you have any other closing thoughts?
Mark Fleming: Simply thank you! Thank you to all the hard working people in this industry that worked hard in a truly unprecedented situation to make this year so great for our market.
We had more home sales than any year in the last decade and refinanced more mortgages than in any other year in the last decade except 2012. This turned into an exceptional year for the housing market.
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