With the economic upheaval America experienced in 2020, many house flippers and buy and hold investors are asking how real estate investing will fare in the coming year.
Real Estate Investing | Single Family Home Sector Remains Strong
While the Covid-19 pandemic ravaged the U.S. economy last year, single-family housing is one sector that has remained extremely strong. Despite the lockdowns and supply chain interruptions that decimated big and small businesses last year, prices of single-family homes continued to surge, with declining interest rates encouraging home-bound Americans to shop for new homes both in and outside of metro areas.
Is a Housing Bubble Imminent?
While housing has remained hot, some investors are wondering if a bubble is to be expected in the coming months due to steadily rising home prices, which climbed more than 15% in 2020 (over 2019 prices). Industry experts and forecasters think not.
In a December 30, 2020 commentary from Wells Fargo Economics Groupopens PDF file , the lending giant shared:
“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.”
Unlike the real estate bubble that burst over a decade ago, homeowners, for the most part, are not overextended on their mortgages due to lax underwriting protocols. In fact, data suggest that the price spikes in most markets are directly related to inventory shortages that accompany an increased demand for homes. The recent shift to working and learning from home has given families more latitude in where they choose to live, and many are seeking larger homes further away from metro centers. Apartment renters are also looking for larger homes to lockdown in.
Real Estate Investing in Metro Markets
If the exodus from metro areas continues, real estate investing in the multifamily sector may be significantly impacted. Investors will be keeping a close eye on this trend and carefully calculating the effect of these changes on the multi-family sector. As vaccines become more available, unemployment numbers are expected to shrink, and time will tell how investments in the apartment market will fare.
For house flipping investors, forecasters expect to see an increase in foreclosures and distressed home sales beginning in Q2 as CARES Act provisions that have protected homeowners since last March begin to expire. The inventory shortage will benefit house flippers, who can transform foreclosed and distressed properties to turnkey homes buyers are desperately seeking. Also, as the rollout of the Covid-19 vaccine ramps up this year, we should see an increase in home listings as more homeowners take their moving plans off pause to trade up or downsize depending on how they are faring in this economy.
Housing Affordability Will Challenge Buyers in 2021
According to Wells Fargo's recent study of the real estate landscape:
Affordability, or more aptly the lack of affordable homes, remains the biggest challenge for the housing market. We believe buyers will respond to this by shifting their attention to the suburbs and exurbs of their current market or relocating to more affordable second-tier large metro areas, such as Phoenix, Dallas, and Atlanta, as well as rapidly growing larger metro areas such as Austin, Nashville, Tampa, Jacksonville, Charlotte, and Raleigh.
Recent data from online real estate portals Redfin and LinkedIn reveal a marked increase in families relocating from metro to suburban markets. Some rural areas are also experiencing an uptick in home buying and a corresponding rise in prices.
Overall, homebuyers may remain temporarily sidelined in some markets during the first quarter of 2021 waiting for Covid vaccine distribution to improve, but forecasters say the stage is set for a hot spring and summer housing market.