Turning 21 And Ready To Rock!

Housing experts say in concert that the mortgage and real estate fields are going to be BIG HITS this year.

Lew Sichelman
A large crowd at night rocks out to music at a festival.

There is no question that housing has so far led the country through the economic doldrums caused by the COVID-19 pandemic. Indeed, when the final count comes in later this year, new and existing home sales in 2020 are likely to have set a record.

“If you asked around, it would probably be difficult to find anyone who has something nice to say about the year 2020 as a whole,” says Keith Gumbinger of HSH Associates, a New Jersey mortgage information service. But that’s “unless you ask people connected with the residential real estate industry.”

Whether they are mortgage lenders or brokers, realty agents or sales associates, homebuilders or folks with significant connections to or between them (think title agents, real estate attorneys and the like), Gumbinger says these professionals “would likely have very nice things now to say about 2020, at least from a business standpoint -- and that’s even if they were cursing their misfortune only eight or nine months ago.”

Now the question is, can the market keep up its blistering pace in 2021? And the answer is – drum roll please – yes, at least for the time being.

Bolstered by a new president who supports housing with, among other things, a $15,000 tax credit to be taken at closing, not when home buyers file their federal income tax returns, the market should continue to thrive, according to most housing economists. There may be a few bumps along the way. But otherwise, only a lack of properties for sale should pose any real problems.

“The Biden Presidency could bring several impactful changes to the house market,” says Lawrence Yun, chief economist at the National Association of Realtors. “The home buyer tax credit he proposed as a candidate would help Americans cover their down payment, and an expected wider role for Fannie Mae and Freddie Mac in the secondary mortgage market means mortgage rates will remain low.”

To see what mortgage professionals and their allies can expect going forward, let’s dissect the housing sector into its four key components – existing houses, newly constructed homes, financing and mortgage rates. Then, we’ll follow up with a few words about the commercial sector:

Existing Homes

The housing market has been nothing short of “exceptional” during the pandemic, says NAR’s Yun. “Considering that we remain in a period of stubbornly high unemployment relative to prepandemic levels, the housing sector has performed remarkably well.”

And he’s expecting the favorable climate to flow into this year. On top of a three percent gain in sales last year, he is calling for a nine percent gain in 2021. “The ‘secondorder’ housing demand arising from remote work flexibility and changing housing preferences will continue,” he proclaimed at his group’s annual conference – virtual this year – in November.

Despite the virus – and in many cases, because of it – resales grew in October for the fifth consecutive month to 6.85 million. (At this writing, October is the most recent month for which statistics are available.) But existing home prices also have skyrocketed. The median in August was $310,600, an 11.4 percent jump from a year earlier. By October, it had moved to $313,000, a 16 percent gain from the year before.

Despite ever rising prices, there has been an increase in multiple offers for the same house, especially for starter houses sought by first-time buyers. The result: one winner and perhaps several losers – in one case, nearly 40 bidders lost out -- some of whom have gone on to other choices but others who have simply dropped out of the market.

The speed at which houses are flying off the shelves is, indeed, remarkable. NAR says nearly three out of four sales were on the market for less than a month. An the RE/MAX chain says its listings lasted on the market an average of just 38 days in October.

All of this has led to an extreme shortage of houses for sale. As of October, a record low 2.5-month inventory of properties were on the market. That’s down from 3.9 percent a year earlier, and less than half the six-months supply of homes for sale that’s considered normal. “Even as mortgage rates continue to fall and improve house-buying power, you can’t buy what’s not for sale,” notes Mark Fleming, chief economist at title company First American.

Despite the probability that owners could command a healthy price for their properties, they aren’t selling – for any number of reasons. They may be out of work at the moment, or perhaps they are satisfied with what they have and don’t want to move. Most likely, though, they fear being unable to land a replacement house at a price they can afford.

That’s why Yun is hopeful that home builders will take some of the slack.

New Homes

As has been the case for the last several years, new construction is facing a number of headwinds, including the lack of building sites, rising material costs and a shortage of labor. Nevertheless, confidence among the nation’s home builders has never been higher. Indeed, as measured by the National Association of Home Builders, builder confidence hit successive all-time highs in September, October and November.

Sales are so strong right now that builders’ construction crews are having a tough time keeping up. NAHB Chief Economist Robert Dietz reports “a notable gap” between sales and construction, with “a growing number of contracts attributable to homes not yet started.” In September, for example, sales for houses on which builders have yet to put a shovel in the ground were up 47 percent.

“Housing starts need to increase just to cover the number of places already sold,” says Ali Wolf, chief economist at consulting firm Zonda. Zonda, formerly known as Meyers Research, has new home sales performing at their highest level since 2006, with pending sales growing nearly 46 percent year-over-year. “Persistently strong contract sales are pulling down inventory,” with the count off 15 percent from a year ago.

As has been the case in the resale sector, low loan costs, favorable demographics and a shift to suburbia and beyond have spurred demand for new homes that can meet the need for more space, perhaps for extended families or for home offices, exercise rooms and the like.

Sales of newly built, single-family homes in October dipped 0.3 percent to 999,000 on an annualized basis from September. But despite the drop off, the October pace was 41.5 percent higher than the same month a year ago. Of the 278,000 new single-family homes still for sale, just 44,000 are completely and ready for occupancy for buyers who must move right away.

That’s why Dietz is looking for 947,000 housing starts this year and 971,000 next year. At the same time, he expects sales to hit 844,000 in 2020 and 862,000 in 2021. But the NAHB economist is concerned that construction costs in the form of higher material and labor expenses will drive new home prices higher and out of the reach of first-time purchasers. Framing lumber alone was up 50 percent year-over-year in November. “Affordability remains an on-going concern,” he says.

Another potential problem for builders is the Biden proposal to abolish the Sec. 1031 exchange provision of the tax code, a benefit used by builders to trade raw land with developers in exchange for finished lots. Under the law, taxpayers can defer capital gains liability on the non-simultaneous exchange of certain property. So if Biden has his way here, buildable lots will be even more expensive, not to mention harder to come by. The lot supply is already down 8 percent year-over-year, reports Zonda’s Tim Sullivan, but prices are up 5.6 percent.

Still, the “Great American Land Rush,” as the John Burns Real Estate Consulting firm calls it, is on as builders and developers search for spots on which to build. In September, Burns said the residential land market had fully recovered during the second quarter 2020 from spring’s pandemicinduced uncertainty. Paused land transactions were back in full force by the start of the summer, and 60 percent of top land brokers rated their markets as Hot or On Fire. Fastforward three months and almost all of those land jockeys rate their markets as such.

The Burns team is advising its clients to “buy land or shrink.” And towards that end, at least one land developer has started an effort to keep small builders in business. Atlanta’s Parkland Communities’ Small Builder Program focuses on those who erect fewer than 100 houses a year. The company is actively searching for five to 20-acre parcels that can yield up to 50 lots and will subordinate the developed sites to the builder’s construction loan so no equity will be required.

Financing

There can’t be sales unless there is financing. And on that score, lenders have been extremely busy. So much so that soon after the Mortgage Bankers Association offered its annual forecast in October, it revised its projections upward – both for 2020 and 2021.

“Given the strong pace of home sales,” the MBA now says that when the final count comes in, total loan originations will hit $3.39 trillion in 2020. That’s twice the volume nailed in 2019 and the highest amount in almost two decades. Of course, a big part of that has come as a result of refinancing as current owners take advantage of record low interest rates. But the number of purchase money loans will likely be the most since 2005.

For 2021, the MBA is projecting total originations to fall as refinancing slows. But at $2.56 trillion, it would still be the second highest total in 15 years. And it predicts that purchase money lending to home buyers will reach $1.59 trillion. That would eclipse the previous all-time high of $1.51 trillion set in 2005 only a few years before the market collapsed in a heap of bad loans and silly financing.

If an effective vaccine brings the virus under control, Mike Fratantoni, this group’s chief economist, see a gradual economic recovery, one that is aided by further fiscal stimulus. He says 2021 should be “a year of continued purchase money growth... particularly the second half.”

It should be noted that all this has come in the face of tighter lending standards. Thus, the surge of activity has been largely at the upper echelons of the market, from borrowers seeking higher-balance loans. But lending has been opening up gradually for those who are less well-heeled or don’t meet the strict criteria imposed by Fannie Mae and Freddie Mac, the two government sponsored enterprises which purchase loans from primary lenders.

After pulling back at the start of the pandemic, a number of big banks and non-bank lenders have returned to the market for so-called Non- QM, or non-qualified, mortgages. These financing vehicles were once known as “subprime” but they’re not nearly as dangerous as the liar loans, negative amortization mortgages and state-income financing that led to the collapse in 2008.

Today’s Non-QM loans have to meet the same standards as those sold to Fannie and Freddie. But lenders offering them stretch the playing field based on the borrower’s credit score and loanto-value ratio. The latter means they’ll exceed the 43 percent DTI ceiling than binds that GSEs. And they’ll often lend amounts above Fannie and Freddie’s statutory limits, which will be $548,250 this year in most places – and a whopping $822,375 in most high cost markets.

Mortgage Rates

As of mid-November, mortgage rates had tumbled to a record low of 2.71 percent, according to Freddie Mac. It was the 13th time rates had a hit a record low in 2020. But how long they continue to scrape the bottom remains to be seen.

NAR’s Yun expects rates to average 3.1 percent in 2021. Dietz of the NAHB is looking for 3 percent on average. But the MBA’s Fratantoni expects them to rise to 3.3 percent by next year’s fourth quarter.

Unfortunately, housing prices are rising so fast -- “too fast,” Yun told one media outlet recently -- that they are all but obliterating any gains buyers are seeing from record-low interest rates. So, even if rates continue to fall -- and Fleming at First American thinks it’s possible they could dip as low as 2% -- house prices are poised to continue rising so quickly that any savings could be minimal, if not wiped out altogether.

Commercial

“ Pre-pandemic, I don’t think anyone was questioning the future of office,” an investment manager told researchers who prepared the latest “Emerging Trends in Real Estate” report from the Urban Land Institute. “Now, I thinks it’s a legitimate questioning to be discussing.”

Induced by COVID, the rapid shift to widespread work-from-home will be the ultimate test, the 114-page report maintains. And with nearly all the office real estate professionals queried for the report in agreement that companies will allow their employees to work from home at least part-time going forward, they expect many tenants will shrink their footprints to save money.

Now in its 42nd year, Emerging Trends is one of the most highly regarded annual outlooks for all segments of the real estate business. The latest edition includes interviews and survey responses from 1,667 industry professionals, including investors, fund managers, developers, property companies, brokers, advisors and consultants.

The WFH trend is not new, of course. But the pandemic has accelerated it. “Now, virtually everyone works from home, and it has legitimacy,” says Andrew Warren, director of real estate research at PwC Management Services, a co-sponsor of the ULI report. “Going forward, users will be looking for a right balance, the right mix” between working from home and going to the office.

In that regard, about three in five of the Emerging Trends participants also expect some office tenants will seize on the opportunity to expand their spaces at reduced rates. Normally, Owen Thomas of Boston Properties points out, tenants try to jam more workers into less space. Now, “it’s the complete reverse; they are spreading out.” Meanwhile, John Oharenko, director of the Real Estate Capital Institute, reports that lenders remain conservative, focusing “heavily on borrower experience and financial resources, in addition to asset quality.” Still, they are “flush with cash” and yearning to put it to work, he adds. “Unlike the Great Recession, funds remain available but based on very selective criteria. “

Finally, analyst Jade Rahmani at the Keefe, Bruyette & Woods investment banking firm is one of many who sees the commercial sector as slow to recover, especially around trends that will take time to unfold.

Nevertheless, he believes the virus will eventually accelerate the outsourcing of real estate services to the benefit of realty brokers. His 2021 projection for the firms he follows: Reflecting modestly stronger transaction volumes and stronger margins driven by cost reducing initiative, a 5-9 percent gain.

This article was originally published in the NMP Magazine January 2021 issue.
Lew Sichelman headshot
Lew Sichelman,
National Mortgage Professional Contributing Writer

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.

Published on
May 13, 2021
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