Housing: Can the Market Continue to Grow?

Even amidst the economic devastation caused by the COVID-19 pandemic, the housing market in many areas of the country has boomed. There are a number of factors involved, most notably an imbalance in the supply of housing and the demand as well as historically low mortgage interest rates. Can the demand for housing continue to grow?

Consumer Confidence in the Housing Market

According to Jay McCanless, Wedbush’s Homebuilder Analyst, “Confidence has stayed high in the face of rising interest rates as evidenced by year-over-year declines in cancellation rates and steady order growth. Fannie Mae’s latest monthly home purchase sentiment index in February showed consumer sentiment has continued to improve since the COVID low in April 2020.”

Housing Supply Low/Limited

Even before the pandemic hit, the supply of housing was lower than the demand for it in many areas of the country. Since the onset of the pandemic, this imbalance has continued. We’ve seen a number of residents of urban areas look for homes in suburbs and outlying areas.

At the same time, we’ve seen a lot of potential sellers who had considered listing their homes change their plans. McCanless says, “We think it should be a seller’s market for the foreseeable future which may result in further home price appreciation.”

Trends in Pricing and Mortgage Rates

Low mortgage rates have helped fuel the demand for housing. During 2020, mortgage rates hovered around 3%. The National Association of Realtors forecasts mortgage rates of 3.1% for 2021 with the Mortgage Bankers Association pegging their rate forecast at 3.3%.

Real estate data firm CoreLogic reported a 7.3% increase in home prices for the 12-months ending in October of 2020. They expect this pace to cool a bit to 4.1% for 2021.

Impact of Record Low Interest Rates on Demand

These record low interest rates have helped fuel demand among homebuyers. According to the Mortgage Bankers Association:

  • Mortgage applications jumped 33% in August 2020 compared to the prior year. They jumped 27% in November of 2020 compared to a year earlier.
  • In September of 2020, the average home sold in 16 days compared to 28 days a year earlier.
  • In 2020, about two-thirds of the people who purchased a home in 2020 made an offer on a house they had never seen in person.

Pandemic Driven Home Buying – Need for Space

Part of the demand for housing during the pandemic has been fueled by a need for more space. According to the National Association of Realtors 28% of homebuyers purchased a home with space for aging parents compared with 25% of buyers prior to the pandemic.

The percentage of home buyers who purchased a home with room to accommodate adult children rose to 20%, up from 13% prior to April of 2020. According to Pew Research Center, as of July 2020 52% of adults aged 19-29 lived with their parents. This is the highest rate since the Great Depression.

How Homebuilders are Responding to Demand

Part of the supply problem is the shortage of new construction. U.S. home builders have struggled during the pandemic. Prices of many building materials have jumped, adding as much as $26,000 to construction costs of a new home according to the National Association of Home Builders (NAHB). In addition, many builders had not anticipated the level of demand and therefore shut down some operations and laid off workers as the pandemic hit. Many did not foresee the heightened demand for housing.

McCanless notes, “Many homebuilders are growing their lot count and overall business in a prudent but expeditious manner. Most of the current management teams were around for the financial crisis of 2007-08. This has prompted management to reduce debt through this cycle and maintain discipline around land buying. Very different from the 2004-2006 era.”

Market Outlook for 2021

We don’t make specific housing start forecasts, but McCanless indicates the economists we monitor are projecting 8% to 12% single family starts in 2021. He believes that seems reasonable. Much of course will depend on the direction of interest rates, the supply of housing and the health of the economy.

Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management.


These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.