The COVID-19 pandemic has caused housing prices to skyrocket in 2020.  With the uncertainty that has surrounded us for almost a year now, homeowners are hanging tight in their homes for the most part.  As reflected in the stock price of Home Depot and Lowes, the extra time at home has given people the chance to remodel, update, and make that home office presentable for the Zoom audience.  Are these DIY updates causing home prices to increase by 15%?  Many are asking why and how because they know that businesses are closing and people are losing (or lost) their jobs more in 2020 than most years.

There could be a number of factors contributing to the overall increase in housing prices.  Here are four that stand out from the crowd:

1- People aren’t moving

The uncertainty of the job market has people staying put for the most part.  Companies are navigating unchartered waters by way of uncertain revenue estimates, remote work, and paying for empty office space when their team is just as productive at home.  The average homeowner might be thinking – am I the next one to be furloughed or laid off?  Am I going back to the office?  Will things go back to normal when a vaccine comes out?  The general uncertainty in 2020 has people waiting to make moves.  For these reasons, there are less homes being listed on the market.

According to a Realtor.com’s economic research analyst, the number of homes listed for sale in September 2020 was 39% lower than those listed for sale in September 2019.  Economics 101 will tell you that the law of supply and demand directly applies to this housing market.  Lack of supply or houses for sale is causing scarcity in the market which leads to more buyers bidding for the same house.  These bidding wars are causing housing prices to sell for more than asking in most areas, which is contributing to the overall spike in prices.

2- Rock bottom interest rates

“You will never see rates lower than this”, is the claim that lenders have been making for the past decade since the financial crisis in 2008.  The fed funds rate, which is the target interest rate set by the Federal Open Market Committee (FOMC), is near zero for only the fourth time in the past 60 years.  The “fed” has the ability to control these rates when economic disasters (Financial Crisis of 2008, COVID-19) arise in order to give businesses incentives to take cheap loans, grow their business and hire employees.  The trickle-down effect also gives consumers the opportunity to take advantage of lower interest rates for mortgages as well.

Lower rates give home buyers the chance to buy more home than they were able to just a year ago.  Interest rates the past three years have averaged 4.5% for the standard 30-year fixed rate mortgage.  As of the publication of this article (Nov. 2020) the rate on a 30-year fixed mortgage was averaging 2.9%.  Here is an example on how this affects the purchasing power of buyers in this market. 

Someone looking to purchase a home for $350,000 with a 5% down payment ($17,500) and a 30-year fixed rate mortgage of 4.5% could expect the mortgage (principal and interest) to be $1,684 per month. 

Compare that to a mortgage in today’s rate environment.  A home valued at $426,000 with a 5% down payment ($21,750) and a 30-year fixed rate mortgage of 2.9% yields the same mortgage (principal and interest) payment of $1,684 per month.

That drop in interest rates alone increased purchasing power by roughly $76,000!

3- Demographic shifts do not stop for pandemics

A pandemic may have caused the world to stop and take breath but the one thing that a pandemic will not stop is time.  Baby boomers have been the topic of choice for the past decade as the previously helmed “largest generation” moved into retirement, but the shift in focus goes to the millennials who are moving out of their parents’ basements and into adulting.

Those younger generations who are more tech savvy are the ones keeping their jobs, feeling more secure in the newfound remote workforce and taking advantage of the low interest rates by diving into home ownership.  This demand for housing and sudden ability to afford housing (due to low rates) is a contributing factor to the increases we are seeing in home prices.

4- COVID babies

Another factor that is disputed by experts is the potential “COVID boom” in births.  Similar to the “baby boomers”, who received their generational name from the spike in births that followed the end of WWII, the COVID boom in baby births has yet to be confirmed but the extra time locked up with your significant other might yield a population increase come Spring 2021. 

Growing young families means that there is still demand and need for the forever home and space needed to accommodate the growing millennial family.  This in combination with the 40% decline in home listings makes for one of the most competitive housing markets on record.

Sources: 

https://fred.stlouisfed.org/series/MSACSR

https://www.realtor.com/research/october-2020-data/

https://www.macrotrends.net/2015/fed-funds-rate-historical-chart