Has the Real Estate Boom Gone Bust?
The 2020 real estate market has gone in directions that nobody could have anticipated. In the beginning of the year, the economy was steady and so were home sales. Then, the pandemic hit. Overnight, entire states were locked down and millions of Americans were out of work. With so many unemployed and whole industries paused, many predicted the collapse of the real estate market. Experts thought that millions would fall behind on mortgage payments and their homes would go into foreclosure. Suddenly, a large influx of homes would be for sale collapsing home prices just like the 2008 recession. That didn’t happen. Instead, the Federal Reserve slashed interest rates, which dropped mortgage rates to historic lows. In response, 2020 saw a housing boom that hasn’t been seen since 2006. However, the housing market has cooled slightly in recent weeks, which begs the question: Has the real estate boom gone bust?
Why are People Fearing a Real Estate Bust?
Right now people are fearing that the boom in home sales for two main reasons: rising home prices and a dip in mortgage applications. Over the course of 2020 home prices have risen dramatically. This is a result of simple supply and demand. The demand for homes went through the roof this year because of historically low interest rates. Many first time home buyers saw this as their opportunity to jump into the real estate market for the first time. Current home buyers also saw this as an opportunity to get a second home to use for vacations. Many homeowners also sought to buy a new home to get more space for themselves to adjust to the new demands placed on us by the pandemic. All of this combined meant that more people were buying homes at any point in the last decade.
While demand for buying a home increased, the supply stayed the same. New home construction never planned for this demand, so there were not enough existing projects in the pipeline. To add to the stress on inventory, many of the planned projects had to stall construction because of the pandemic. Projects stalled out because of lockdowns and materials shortages, which delayed any new homes getting onto the market. Since demand was increasing and the supply was stagnant, home prices went through the roof. At some point home prices become too high for potential home buyers and the housing market hits a ceiling. Are we at that point?
Some people fear that we have hit the real estate market ceiling. There is some data to back up the idea that we have already hit the peak of home demand and that the buying spree is over. First, some of the home sales figures have come in from the past few months and home sales declined by 3.5% in September. Additionally, some current numbers suggest this might not have been a blip. A couple of weeks ago, new mortgage applications hit a six-month low. Less people are buying new homes and fewer mortgage applications have been submitted. The question is whether or not this is a dip, a pause, or a sign of an impending bust. We think there are good reasons why the real estate market boom is far from over. However, the pause people buying homes might last a few months.
Why We Think The Real Estate Market Boom Isn’t Over
There are several factors that can explain the temporary slowdown of home buying that we have seen recently. There are also some good reasons why these factors will only be temporary.
One of the factors that is causing a temporary slowdown is the fact that the real estate market is cyclical. Oftentimes home sales decline during fall and winter. This makes sense when you think about it. First, as the weather gets colder, people venture out of their homes a little less. People do not want to go looking at new houses when the weather isn’t great or they will look at less houses. Homeowners are also less likely to put their homes on the market during the colder months for similar reasons. They are at home more often, so they do not want a lot of people stopping by. As the weather gets better, so should home sales.
Another factor that is causing a temporary slowdown is the pandemic. The spread of the coronavirus is at an all time high in the United States. Those concerned about the virus are less likely to leave their home or go into stranger’s homes. As the spread of the virus increases, more and more people are choosing to hunker down. Furthermore, the increase in cases is causing a lot of states and localities to reinstitute policies designed to slow its spread. Social distancing mandates are increasing and so are curfews. The tighter the restrictions, the less likely people are going to try and sell their home or are willing to try and buy a home.
There is help on the way. Several new vaccines are in development that have been proven to be effective at stopping the virus. It might take a few months, but the new restrictions and the impending vaccines will hopefully mean that we are in a better place soon. It might take a few months, but this coronavirus surge will pass. When it does, there is good reason to believe that the housing market will resume the hot streak of 2020.
Final Thoughts
Even though the real estate market has shown some signs of a slowdown that does not mean that the market boom is over. The number one driving factor of the red hot home buying market has been low mortgage rates. Those are not going away in the short term. Mortgage rates are at historic lows because the Federal Reserve slashed interest rates to avoid an economic collapse. As we face the latest coronavirus surge and businesses are forced to close, there is just as much reason to keep interest rates low. Once the weather gets warmer and home buyers feel safer leaving their homes, the real estate market should pick up where it left off.
If anything, now is the perfect time to talk to a mortgage broker. This will give you the chance to see which types of mortgages you might qualify for. If you do not qualify, then it gives you a few months to put yourself in a better position to buy a home. If you have been thinking about buying a new home contact us now. We can give you the education and resources you need to make buying your dream home a reality.
