SHOULD WE FEAR A REAL ESTATE CRASH IN THE USA?

 SHOULD WE FEAR A REAL ESTATE CRASH IN THE USA?

The burning question is: will the Covid-19 pandemic trigger a housing crash in the US? The virus has shattered the global order, and the US economy has been struggling since the Great Depression. For the past year, the real estate market, like many other sectors, has been on standby. What can we expect?

US Real Estate Market: State of Play

The real estate market is one of the pillars of the American economy. With borrowing rates rising and home prices climbing, economists are showing confidence that the market is likely to remain strong, due to limited inventory and growing demand. Millennials continue to enter the market, ready to purchase houses and apartments in 2021. Today, this segment of the population represents the largest proportion of real estate buyers in the United States (source: NAR 2020).

In March 2020, the trend suggested a possible housing crash in the US. Indeed, the real estate market was in sharp decline, with the order to stay home. Since then, home buying has been supported by low interest rates, which have kept the US real estate market afloat. In the doldrums caused by the aftermath of Covid-19, real estate is one of the sectors that has proven resilient. In 2020, the housing market rebounded much faster than any other sector of the US economy. This growth has been maintained through 2021.

Old real estate

The year 2020 marks a record year for the American real estate market. On average, a home sold for $266,104 in December 2020, an 8.4% increase from December 2019. This means that 5.64 million homes were sold during 2020, a 5.6% increase compared to the previous year. In fact, sales of existing homes reached their highest level in 13 years. In February 2021, this level fell back to the lowest level since September 2020. Despite this decline, sales increased by 9.1% compared to the previous year and prices increased by nearly 16%. It appears that the shortage of available homes is affecting real estate sales in the United States. With the housing market struggling to keep up with demand over the past 10 years, demand has simply exploded during the pandemic.

New real estate

Looking at new homes, sales decreased by 18.2% in February 2021. However, compared to February 2020, there was an increase of 8.2%. Construction of new single-family homes is expected to increase in 2021, reaching a median price of $349,400, 5.3% higher than the price posted a year earlier. With the rising price of raw materials, particularly wood, this has a direct impact on the price of new homes, as does the lack of real estate for sale. In some areas, home construction remains the only viable option for potential buyers.

A hyperactive market

In 2021, the housing market was hyperactive. As a result, real estate prices rose, properties sold quickly, and market conditions were competitive. Currently, the housing supply is tight; it is lower than at any time since the beginning of the century. Economists expect real estate prices to continue rising until either supply increases or demand decreases.

Whether or not we're talking about a housing crash in the US, it's clear that housing supply is set to increase in the coming months. Real estate agents and other industry professionals believe the rollout of the first Covid-19 vaccine should ease sellers' concerns, improving supply trends throughout 2021. Furthermore, the past two months have seen an improving economy, which is maintaining some upward pressure on interest rates.

As of February 2021, the unemployment rate remained at 6.2%, below the record highs reached in April 2020. Remote working has impacted the demand for additional space, but the number of people working from home continues to decline month after month.

In February 2021, nearly 23% of employees were forced to work from home, compared to 23.2% in January. These rates will almost certainly have an impact on home sales and rents in the coming months. For the moment, rent increases are lower than those seen before the pandemic, but the overall downward trend is stabilizing.

Interest Rates and Mortgages

Meanwhile, interest rates appear to continue rising. The Federal Housing Finance Agency also announced that it would limit its purchases of secured loans for second homes and investment properties to 7% of its portfolio. As a result, loans for the purchase of second homes and investment properties could become more expensive in the coming months.

Borrowing rates have been trending upwards, rising from 0.5% to 0.75% for second homes and investment properties. If these rates continue to rise in the coming months, this could affect buyers' cash flow and hamper demand in the coming months.

Real estate supply and demand in 2021

Millennials are expected to continue to gain momentum in the US housing market in 2021, with both first-time buyers and older millennials expected to be strong. One thing is certain: the housing market promises to be highly competitive for buyers in 2021. Given the current shortage of housing supply and the high number of buyers actively searching for homes, the current rate of housing price growth is unlikely to change in the short term.

Data released by Realtor.com in early March 2021 indicated that the median price of listed properties increased by 14.3% compared to March 2020. This marked the 30th consecutive week of growth.

Given the persistent imbalance between supply and demand for real estate in the United States, the upward trend in real estate prices is expected to remain constant in 2021. However, there are reasons to believe that a change in the intensity of the trend is on the horizon. The pace of growth can only slow if the supply of real estate increases or if demand decreases.

While many commercial closures have been imposed across the country, homes are selling quickly and the number of available properties continues to decline. Typically, new listings increase the inventory of available properties as spring approaches. The recovery in housing demand currently continues to outpace supply. To address the limited number of existing homes available for sale, buyers are turning to new construction. This phenomenon should help fuel the continued rise in new home sales in 2021.