Even with the strong year on year home sales gains over the last three-plus months, 2020 home sales are still slightly down across the U.S. when compared to 2019. The catch-up demand from the frozen market due to COVID-19 has not been quite enough to get us back to overall growth. However, if we continue the current trend for the rest of the year, we will end up with a very solid 2020 despite the COVID-19 turmoil.
My biggest concern for housing in 2021-2024 is that real home prices could take off. Good housing demographics, housing tenure at 10 years and low mortgage rates are a perfect recipe for unhealthy home-price growth. The median sales price is now more than 10% higher than a year ago. I’m not saying that home-price growth will move into a speculation bubble like it did in the 2000s (our credit lending standards should prevent that), but housing could become considerably less affordable even with low mortgage rates if this continues.
Because housing is becoming an outperforming asset, we may see an increase in cash buyers in 2021 as a percent of sales. Housing may be an attractive place to park money for yield returns when yields are low elsewhere, and this could also increase demand slightly in 2021. Rates, of course, still matter. Mortgage rates continue to be one of the primary drivers of demand.
Despite the recent increased demand, the existing home sales demand market is not overheating. 2019 was a moderately healthy year for housing in that we had negative year-over-year real price gains and sales stayed flat. But more recently, price growth is rising higher as demand has picked up. We are at home sales levels now that depend too much on lower rates.
In order to stay out of “speculation” mode, I would like to see home price growth flatten out in the coming months. However, that may be hard to accomplish as low rates will continue to drive demand.