From the Wells Fargo Economics Group…

Housing Flipped the Script on COVID in 2020. What Will Happen in 2021?

The pandemic wreaked havoc on most of the economy in 2020, with the notable exception of housing. The onset of lockdowns as well as the rise of remote work and remote schooling flipped the script on COVID by strengthening demand for single-family homes, townhomes and suburban apartments. Pandemic-driven job losses, however, also led to a spike in the number of people behind on mortgage and rent payments. Moreover, many homeowners have taken advantage of expanded forbearance options to put off mortgage payments. With vaccines now rolling out, questions are arising as to how long lasting these shifts will be. We address a few of these questions in this report and provide our insights into where we believe housing is headed in 2021.

Is There Another Housing Bubble?

One of the most frequent questions we get is what is the risk that the red-hot housing market will turn into a bubble? Most of the housing bubble worries stem from the resurgence in home prices. The median price of an existing single-family home has surged 15.1% over the past year. The price spike, however, is the result of the sudden increased demand for housing rather than increased speculation. The pandemic has unleashed some unusual supply and demand dynamics. The surge in remote work and remote learning combined with the increased proportion of time that people are spending at home has set off a race for more living space. More apartment renters are looking to buy and more homeowners are looking to enhance their current homes or buy larger homes. This change in preferences results in an outward shift in housing demand that by itself drives home prices higher.

The supply of housing has also been disrupted. While more people want to buy homes, fewer want to sell them. The supply curve has shifted inward and the inventory of homes for sale has fallen to an all-time low. Folks that were thinking about downsizing are now holding onto their current
homes because they need them for workspace or to house their adult children returning from school or urban apartments. Rather than selling, many homeowners are investing in upgrades, increasing demand for remodelers and driving up sales at home improvement centers.

Perhaps the greatest difference with what was seen in the bubble years is the greater discipline on the part of lenders. Mortgage underwriting tightened at the onset of the pandemic and remains fairly tight today. The average FICO score for conventional mortgages originated for the purchase of a home was 758 in November, according to Ellie Mae. Fewer than 10% of mortgages were originated by buyers with FICO scores of 655 or less. For refis, the average FICO score was 765 and cash-out refinancing’s are nowhere near as prevalent as they were in the bubble years. Homeowners also have substantially more equity in the homes today. Federal Reserve data show single-family home equity at record $20.4 trillion, or nearly two-thirds of single-family housing values. Moreover, with lower mortgage rates, many homeowners have been able to refinance their mortgages at lower rates, reducing their monthly payments and enhancing their creditworthiness.

Please click here to read the full report from Wells Fargo.