Welcome to our February newsletter. This month, we cover long-term trends in the United States, considering the ways in which history can inform our future. We also compare the 2020 and 2019 calendar years in our local area, using 2019 as a “normal” year to reflect upon 2020 trends. We don’t want to jinx anything, but we may have turned the corner on the pandemic.
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New cases are declining after peaking in early January, and the United States is administering over 1 million vaccinations a day. Whether we are on the back side or not, COVID-19 will have lasting effects on how we live and work. In particular, the pandemic has substantially raised housing demand. Working from home, or at least working in non-office settings, is here to stay, and all-time-low mortgage rates have incentivized renters to enter the housing market because the cost of buying may be lower than renting.
For these reasons, we suspect that demand will continue to remain high through 2021. As we navigate an ever-changing economic landscape, we remain committed to providing you with the most up-to-date market information so you feel supported and informed in your buying and selling decisions. In this month’s newsletter, we cover the following:
- Key Topics and Trends in February: We are entering 2021 with a low supply of houses and unseasonably high demand for the winter months. Mortgage rates are likely to remain at their current historic lows through 2021, making rising home prices more affordable and causing more buyers to enter the market. The homeownership rate is at a 10-year high.
- February Housing Market Updates: Single-family homes are massively undersupplied relative to demand, contributing to further price appreciation. Condo prices remain stable, and inventory has begun to decline.
Key Topics and Trends in February
This month, we are taking a step back from discussing short-term trends so that we can dive into secular trends (trends that are neither seasonal nor cyclical) to help us understand the current housing environment. We use three metrics in the chart below—the ratio of single-family home starts (new construction)/single-family homes sold, Months of Supply Inventory, and average 30-year fixed mortgage rates—as they all provide insight into supply and demand.
The first two metrics indicate levels of supply and demand. The ratio of single-family home starts to new single-family homes sold indicates the level of production versus demand, while Months of Supply Inventory (MSI) reflects the number of months it would take for the current inventory of homes on the market to sell given the current sales pace. The third metric, average 30-year fixed mortgage rates, shows the cost of financing a home.
1980-1995 Highest Mortgage Rates
The early 1980s marked the highest mortgage rates in the United States—over 18%—as well as the secular decline in rates since that peak. During the 16-year period between 1980 and 1995, the ratio of housing starts to homes sold stayed fairly stable, which is ideal in terms of equilibrium in supply and demand. However, MSI began to shift lower around 1990, indicating that demand was increasing relative to supply.
We saw a small peak in MSI in 1995, which declined until the housing bubble began to burst in 2005. During this period, mortgage rates experienced the steepest drop, with an approximately 11% decline. The difference in mortgage payment from 18% to 7% equates to about $10,000 per month in savings on a $1 million mortgage, making homes much more affordable.
1995-2005 Economic Growth Cycle
This period contained an economic growth cycle. Demand for housing dramatically increased, while the housing-starts-to-new-homes-sold ratio declined and MSI decreased and held at around four months of supply. Credit lending standards during this 11-year period were extremely lax while mortgage rates continued to decline, which further increased demand. Home prices more than doubled from 2000 to 2005. This period marked the beginning of the housing market decline and home appreciation deceleration.
2005-2020
Typically, MSI and the housing-starts-to-new-homes-sold ratio track together, but from 2005 to 2010, they started to show an inverse relationship. MSI rose, while the ratio declined. This happened because, with the Great Recession, demand and new production dropped precipitously and didn’t rebound until 2012. After 2012, the housing recovery began, and we experienced another stable state with fairly steady supply and demand dynamics and consistently low mortgage rates.
During the pandemic and the resulting recession in 2020, mortgage rates fell further, and demand increased dramatically. MSI dropped sharply in 2020 due to high demand and dwindling supply. Mortgage rates have never been lower, which incentivizes more people to enter the market.
The significance of the buying frenzies from 1995 to 2005 and during 2020 is best reflected in the homeownership rate, which also shows the lingering effects of the housing bubble. Home prices started increasing again in 2012, but the homeownership rate declined until 2016. From 2016 to 2020, about half of the homeownership increase occurred in the second quarter of 2020 alone.
It’s difficult to overstate just how unique homebuying trends were in 2020. The homeownership rate increased 2.6% over a single quarter. For reference, out of 223 quarters, only three other quarters had a change above 1%. This was a gigantic jump.
Although we do not expect the same level of buying in 2021, the environment is right for sustained high demand. Supply remains low, and we anticipate a competitive landscape for buyers over the course of this year.
February Housing Market Updates for the East Bay
The median single-family home price rose to another all-time high, and condo prices fell month-over-month; however, year-over-year, both single-family home and condo prices increased considerably, up 20% and 15% respectively.
As you can see in the graph below, median condo prices increased in both counties. Contra Costa condo prices are notably higher, with an almost 19% year-over-year gain.
Single-family home inventory remained lower through 2020 relative to 2019, which speaks to the desirability of the East Bay area. During the pandemic, fewer people wanted to leave, and more people wanted to move to the area. New listings throughout the year were lower than normal, while sales were much higher. By the end of 2020, sales remained steady as new listings declined. With such a consistent level of demand, prices will likely continue to appreciate throughout 2021.
The number of condos on the market declined significantly in December. New condos coming to market outpaced sales every month in 2020 except for November and December, when sales rose higher than new supply.
Days on Market (DOM) declined further for single-family homes throughout 2020, but both single-family homes and condos spent less time on the market in December 2020 than they did in December 2019. As we will see, the pace of sales has contributed to the low MSI over the past several months.
We can use MSI as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California (far lower than the national average of six months), which indicates a balanced market. An MSI lower than three means that buyers dominate the market, and there are relatively few sellers (i.e., it is a sellers’ market), while a higher MSI means there are more sellers than buyers (i.e., it is a buyers’ market). The MSI dropped further in December 2020 to 0.4 months of supply for single-family homes and 1.1 months of supply for condos, both of which firmly favor sellers.
Summary
In summary, the high demand present in the East Bay has buoyed home prices. Inventory for single-family homes and condos will likely decline further this year, and fewer sellers will likely come to market, potentially lifting prices higher. Overall, the housing market has shown its resilience through the pandemic and remains one of the most valuable asset classes. The data show that housing has remained consistently strong through this period.
We anticipate new listings to slow until around March 2021. While the winter season tends to see a slowdown in activity, December 2020 showed higher-than-normal sales despite lower-than-normal inventory, once again highlighting the desirability of East Bay.
As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.
Click here for the January market update.
Looking for a realtor in the Bay Area? Call us at 925-415-0835!
Welcome to our November market update for East Bay. This month, we take a look at the ways in which current U.S. economic conditions are affecting local, state, and national real estate markets. In particular, we examine some crucial economic indicators, such as third-quarter Real Gross Domestic Product (GDP)1 and new housing permits. Although California’s COVID-19 cases remain fewer per capita than those of most other states, cases are rising in California, and the United States as a whole is seeing new peaks every day. Even amidst this uncertainty, demand for homes has never been higher. Mortgage rates continue at all-time lows, and buyers are devoting more of their total spending to housing costs. As we make our way through the autumn months, we continue to provide you with the most up-to-date market information so that you feel supported and informed in your buying and selling decisions.
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In this month’s newsletter, we cover the following:
- Key Topics and Trends in November: U.S. GDP grew 7.4% in 2020’s third quarter,2 but is still 60% of where it would have been without the pandemic. The number of new housing permits is at its highest peak since the 2008–2009 recession. Hiring is slowing, and unemployment benefits have ended for many people.
- November Housing Market Updates: Single-family homes continue to experience high demand, lower inventory, and rising prices. The condo market has shown price appreciation despite higher inventory.
1Real GDP is inflation-adjusted GDP. All references to GDP use Real GDP figures.
Key Topics and Trends in November
In this issue, we dive into some key economic indicators that tend to affect long-term home prices. GDP and employment together explain much of the economic climate and typically trend with housing prices, but they do not explain the current rise in home prices. We will still go over the ins and outs of these indicators, however, because they have received so much press and may affect home prices in the future.
The U.S. Bureau of Economic Analysis reported a 7.4% third-quarter gain to GDP, which is the broadest measure of goods and services produced. During the second quarter of 2020, GDP dropped 9.5% quarter-over-quarter. The second-quarter drop was so sharp that the third-quarter bounce was expected. The long-term effects of the initial drop, however, have yet to be seen. Economists expect lower fourth-quarter GDP growth, which will not make up all the ground lost in the second quarter. Ultimately, the loss in GDP will likely be permanent.
GDP and Output Loss
The chart below illustrates the cost of a recession. While it depicts U.S. GDP from 2005 to present, it illustrates economic patterns that occur in all recessions. GDP tends to grow at a fairly consistent rate during economic expansions. The dotted line in the chart represents the predicted GDP had the 2008 financial crisis never happened, and the green line illustrates the expected third-quarter 2020 GDP had the pandemic never happened. As that green line shows, we are 40% below where GDP was expected to be this fourth quarter. In other words, we are still underwater despite the impressive third-quarter 2020 increase in GDP.
As of October, the Bureau of Labor Statistics reported that 11.1 million workers remained unemployed, which is an unemployment rate of 6.9%. However, the number of out-of-work individuals collecting unemployment insurance has dropped to 7.3 million. In September, the number of unemployed workers and the number of those collecting unemployment insurance were roughly the same. The large number of unemployed workers without government assistance will affect the rental market first, because those working in the hospitality and leisure industries have been most affected by unemployment, and those individuals tend to be renters rather than homeowners.
Employment Rate
The employment level does matter in the long term, particularly for the housing market. Disposable personal income and savings, which both dropped in the third quarter, are two of the most important factors when considering whether or not to buy a home. As a result, we will continue to monitor these numbers.
Existing and New Homes Trend
Despite suboptimal major indicators, housing prices have risen considerably. Nationally, home prices have never been higher, and the high demand for single-family homes has dropped the Months of Supply Inventory to the lowest level ever, according to the National Association of Realtors. Months of Supply Inventory is an important marker of real estate market health because it measures how many months it would take for all current homes for sale on the market to sell at the current rate of sales. Low Months of Supply Inventory means that there is a high demand for homes that will push prices higher more rapidly.
Not only are sales of existing homes up, but so are home building permits. The number of home building permits is the highest it’s been since the housing bubble burst in 2006.
Rise of Housing Demand and House Prices
The rise in housing demand and price under the current economic scenario speaks to three factors: (1) the asymmetric effect of the pandemic on personal income; (2) monetary policy (low interest rates); and (3) buyer preference. Many people have not experienced negative financial effects from the pandemic. An average person who did not lose their job may have even gained financially through a decrease in expenses. Less opportunity for travel, entertainment, and leisure activities could result in an increase in savings. At the same time, mortgage rates are historically low (2.78% as of November 5, 2020) and will remain low for the foreseeable future, making financing higher-priced homes more affordable. And finally, because so much time is currently being spent at home, buyers are willing to use more of their income to create nicer living spaces, buying larger homes, luxury furniture, and new appliances.
In both the short and long terms, housing is one of the best investments one can make.
November Housing Market Updates for the East Bay
Median single-family home prices continued to substantially increase year-over-year with a median home price of $1.05 million in Alameda, an all-time high, and $783,000 in Contra Costa.
Year-over-year, median single-family home and condo prices were substantially up in both countries.
Single-Family Homes and Condos Inventory
Total inventory continued to decline as the number of sold homes rose, far outpacing the new listings that came to market. Like the rest of the country, demand is outpacing new supply, which buoys East Bay home prices. Single-family home inventory is noticeably lower, and is likely to decline as we make our way into the winter months.
The number of condos on the market has increased fairly consistently since May. The demand for condos and new condos coming to market have stayed about the same each month since May with slightly more condos coming to market than bought, which has caused inventory to rise. Condo inventory is 14% higher than last year. However, demand for condos is still high.
East Bay Inventory
Single-family homes sales have climbed since the initial months of the pandemic (March through May). Generally, buyers and sellers left the market in April and May, causing pent-up demand. Sales increased and are still near the highest level this year for single-family homes. Usually, we expect sales to decline in the autumn and winter months, but this year’s summer selling season was delayed and seems to be spilling into autumn.
East Bay Days of Market
The Days on Market (DOM) is lower year-over-year. Months of supply inventory has continued to stay low because of the inventory decline and faster pace of sales.
East Bay Months of Supply Inventory
We can use Months of Supply Inventory (MSI) as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California, which indicates a balanced market. An MSI lower than three means that buyers dominate the market and there are relatively few sellers (i.e., it’s a sellers’ market), while a higher MSI means there are more sellers than buyers (i.e., it’s a buyers’ market). The MSI remained at 0.8 for single-family homes and 1.9 for condos, both favoring sellers.
East Bay Market Update Summary
In summary, the high demand in the East Bay has sustained home prices. Inventory for single-family homes will likely decline further as we enter the winter months with fewer sellers coming to market, potentially lifting prices higher. Overall, the housing market has shown its resilience through the pandemic and remains one of the safest asset classes. Economic indicators are in an anomalous state, meaning that they are out of trend with each other. The data show that housing has remained consistently strong through this period.
We anticipate new listings to slow through the holiday months. Condo prices will likely remain stable with no outsized gains or losses through the winter months. The autumn/winter season tends to see a slowdown in activity, although we may see a new trend this year with higher-than-normal sales.
As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we have shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.
Read about the December market update here.
Call us today at 925-415-0835 so we can start planning for your home goals!
Welcome to our January Market Update. This month, we cover the state of employment in the United States and the likelihood of meaningful stimulus. We also dive into how the Democratic Party’s majority control over both chambers of Congress and the White House could affect asset prices and interest rates.
Most of California (around 98% by population) is under a stay-at-home order due to COVID-19, and the United States as a whole is seeing new peaks every day. With the approval of several vaccines, we finally have a glimmer of hope to move out of the pandemic. However, we know that transmission mitigation measures will still be necessary through 2021 at least. The pandemic has substantially raised demand for housing, and we suspect that demand will continue through this year. Mortgage rates remain at all-time lows, and buyers are devoting more of their total spending to housing costs.
As we enter the new year, we continue to provide you with the most up-to-date market information so that you feel supported and informed in your buying and selling decisions.
In this month’s update, we cover the following:
- Key Topics and Trends in January: Economic recovery is decelerating after months of government relief inaction and a dramatic rise in COVID-19. Mortgage rates are at historic lows, which is likely to persist through 2021, making rising home prices more affordable. Heavy fiscal spending by the Democratic-controlled government could increase inflation.
- January Housing Market Updates: Single-family homes continue to experience high demand, lower inventory, and rising prices. Condo prices are rising as inventory begins to fall.
Key Topics and Trends in January
According to the ADP private payrolls, the U.S. lost 123,000 jobs in December 2020, marking the first contraction since April. Economists predicted an increase of around 60,000 jobs in December. However, they did not anticipate larger companies, especially in leisure and hospitality, laying off employees due to reimplementation of stricter COVID-19 restrictions.
US Employment Recovery Path
Data from the Bureau of Labor Statistics differs in the exact numbers but shows the obvious deceleration in employment growth. As time passes, more and more jobs will be permanently lost, likely with real long-term economic impact: fewer people interacting in the economy usually indicates less buying, which trickles into less production, which trickles into fewer workers needed, leading to more unemployed workers.
Job growth is one of the clearest indicators of economic health, so the December jobs contraction underscores a slowing of the recovery and the need for government stimulus. Under the incoming presidential administration, government stimulus is far more likely but will take some time to implement. With aid, businesses will be able to continue operating and will likely be able to hire significant numbers of employees back, setting the recovery back on course.
To help struggling businesses and people, the government will have to spend significant amounts of money. Heavy fiscal spending is often associated with higher inflation. Currently, inflation is around 1.2% (the Federal Reserve targets 2%), and with the expected increase in government spending, the expected inflation will rise as well. Ultimately, money today is worth more than money in the future. Not only can you buy more today, but real interest rates (inflation-adjusted interest rates) will be lower as well, making a home bought today cost less than its future price.
Mortgage Rate
For example, the average 30-year mortgage rate is 2.67%, and if the inflation rate were 2%, the real interest rate on the mortgage would be 0.67%.
The financial circumstances on the individual level are highly variable, now more than ever. Those who have been unaffected (or even positively affected) financially are likely saving more money than ever. Strict COVID-19 restrictions have largely cut travel, dining, and entertainment expenses, allowing potential home owners to devote more of their income toward buying a home that they love. With historically low mortgage rates and an expected increase in inflation, it’s never been cheaper to finance a home.
Demand shows no sign of decline in the near term. Today, housing is one of the best investments one can make, as it has been historically.
January Housing Market Updates for the East Bay
The median single-family home rose to an all-time high in Contra Costa. Alameda was flat month-over-month but still near peak median price. Year-over-year, single-family home prices increased considerably, up 15% in Alameda and a massive 27% in Contra Costa. Inventory has continued to decline, as fewer homes have come to market and sales have remained high, contributing to the price increases.
East Bay Median Home Prices
East Bay Median Price Changes
Condo Prices by County
As you can see in the graph below, median condo prices were up across counties. Contra Costa had an exceptionally large year-over-year median price increase.
Single-Family Homes Inventory
Single-family home inventory was lower through 2020 relative to 2019. Home sales climbed after the initial months of the pandemic (March through May). Generally, buyers and sellers left the market in April and May, causing pent-up demand. Since June, sales have increased and showed unseasonably high levels in November 2020 for both single-family homes and condos. Usually, we expect sales to decline in the autumn and winter months, but homes were selling at extremely high rates. We can attribute this to fewer holiday obligations in 2020, allowing more focus on homebuying. Single-family home inventory dropped in November due to unusually high sales numbers, and it is likely to decline further as we make our way through the winter months.
Condos Inventory
The number of condos on the market declined significantly in November. New condos coming to market outpaced sales every month in 2020 except for November, when sales inched higher than new supply.
Days on Market
Days on Market (DOM) declined further for single-family homes over the last 12 months, but both single-family homes and condos spent far less time on the market in November 2020 than November 2019. As we will see, the pace of sales affects Months of Supply Inventory (MSI) and has contributed to the low MSI over the past several months.
Months of Supply Inventory
We can use MSI as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California (far lower than the national average of six months of supply), which indicates a balanced market. An MSI lower than three means that buyers dominate the market and there are relatively few sellers (i.e., it is a sellers’ market), while a higher MSI means there are more sellers than buyers (i.e., it is a buyers’ market). The MSI dropped below one for single-family homes, which firmly favors sellers. The MSI for condos fell 0.2 months to 1.6 months of supply, indicating a sellers’ market as well.
Summary
In summary, the high demand in the East Bay has sustained home prices. Inventory for single-family homes and condos will likely decline further into the new year, and fewer sellers will likely come to market, potentially lifting prices higher. Overall, the housing market has shown its resilience through the pandemic and remains one of the safest asset classes. The data show that housing has remained consistently strong through this period.
We anticipate new listings to slow through the holiday months. The autumn/winter season tends to see a slowdown in activity, although we did see a new trend toward the end of 2020 with higher-than-normal sales.
As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.
Looking for a realtor in the Bay Area? Call us today at 925-415-0835!