Strong fundamentals set bullish tone for US housing market in 2021

First American's Fleming bears good news for housing market potential next year

Strong fundamentals set bullish tone for US housing market in 2021

With a vaccine rollout underway, the new year is set for strong performance in the housing market, according to First American Financial.

“The potential for a successful vaccine rollout in the first half of 2021 bodes well for economic recovery in the second half of 2021,” said First American Chief Economist Mark Fleming. “But, first, we need to get through the winter, luckily a time when the housing market is usually slow.”

But even as the housing market enters the colder months, potential existing-home sales continued to increase 3% month over month in November at a seasonally adjusted annualized rate (SAAR) of 6.05 million sales.

Compared to a year ago, the market potential for existing-home sales was up 10% to a gain of nearly 551,135 (SAAR) sales. It is also 10.9% (743,100 million SAAR) below the pre-recession peak of market potential, which happened in April 2006. 

Based on First American’s Potential Home Sales Model, the market for existing-home sales in November outperformed its potential by 1.4% or an estimated 84,262 (SAAR) sales.

What to expect in 2021?
Fleming said that the fundamental forces that shaped 2020 – low rates, limited supply, and demographic demand – are likely to remain constant throughout 2021.

House-buying power, or how much a buyer can afford to spend based on their income and the prevailing mortgage rate, continued to drive demand for homes in for homes last month as rates hover near record lows.

Household formation, mostly driven by millennials, also contributed to an annual gain of approximately 161,00 potential home sales in November.

“The homeownership rate has been steadily rising since 2016, mostly due to millennial household formation,” said Fleming. “The bulk of millennials turned 30 this year and are beginning to age into their prime home-buying years, a demographic tailwind that will continue to boost housing market potential for years to come.” 

However, new- and existing-home inventory remained depleted as tenure length continued to rise, hitting a historically high level of 10.5 years in November. The increase reduced potential for existing-home sales by nearly 175,000, according to Fleming.

Read more: Chief economist says housing’s ‘big shortage’ will continue, could worsen 

“Rising tenure length means fewer and fewer people are listing their homes for sale, keeping housing supply tight,” he said. “Additionally, the lack of new construction in November contributed to a loss of approximately 1,600 potential home sales relative to one year ago. While builders are working hard to deliver more supply to meet rising demand, it will take years to make up the decade-long gap. Fewer existing homeowners listing their homes for sale and a new-home construction deficit means the limited supply of homes for sale will remain another 2021 constant.” 

Due to the low supply and high demand dynamics, house price appreciation accelerated in November and will also continue in 2021. First American’s outlook towards lending standards, on the other hand, is still unclear and will depend on economic conditions in the coming months.

“Strong underlying fundamentals shaped the housing market’s remarkable comeback story in 2020, helping overcome the pandemic-driven spring slowdown and ultimately fueling a record-breaking year. Add a vaccine to the story, and the stage is set for another strong year in 2021.” 

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