By: David H Stevens, CMB
In my almost forty years in the real estate and mortgage finance business, there have been a variety of cycles that have impacted housing. From the oil patch crisis in the eighties, the dot com bubble of 2000, to the Great Recession of 2008, and the most incredible year we just completed, homeowners, housing, and mortgage finance have seen its ups and downs.
The truth behind these market changes is that facts and data matter to markets. Housing is different from other goods and services. Yes, housing is about shelter and that makes it a national treasure that Presidents from both parties have highlighted over the many decades past, but it is far more than that. Housing is the single greatest contributor to wealth in America and when you combine that with the proper market conditions, the ability to build long-term, sustainable, intergenerational wealth can be accelerated.
The fact is, and what many don’t realize, home is where the majority of Americans have the greatest wealth. Wall Street is not the primary wealth driver except for the Ultra-rich as shown in these two charts:
The composition of wealth chart is from NYU Economist Edward Wolfe and shows how the primary residence is the largest source of net worth for all but the Ultra-rich (the top 1%). The second chart is from the census bureau and reflects the fact that for all Americans equity in their home is the highest source of wealth. Facts are funny things, they are irrefutable.
But like any investment, thinking about timing, life status, commitment to a community and affordability, all play into the logic whether now is the right time to buy. Take the Great Recession of 2008. Home prices actually dropped for several years, the result of poorly underwritten mortgages and lack of demand for homeownership due to demographics.
2021 however is an entirely different time for thinking about homebuyer opportunities. Interest rates are at or near historic lows, which will make mortgages more affordable than ever. The demographics of the millennial generation hitting peak buying years is driving enormous demand. And mortgages are being underwritten to the safest standards in history thanks to laws passed this past decade. The fact is that the only barrier to entry is being able to find that home to buy, but if you can get a hold of one, chances are you are in for some wonderful long-term opportunity.
Core Logic’s Chief Economist, Frank Nothaft, just released the home appreciation data from November 2019 to November 2020. It’s proof positive that homeownership has been greatly rewarded:
It’s challenging to find any market where housing did not see great gains. For the Washington DC area, the 8.2% year-over-year home price growth is consistent with the rest of the nation.
Some ask, what does this mean looking forward? Can the market stay strong? The answer from virtually every economist is that there is little downside risk in real estate. We are at one of those unique inflection points in housing where all the stars align, and as GDP expectations are extremely positive for a post pandemic recovery in the economy, it might only look better as we set our sights ahead. Just look at this forecast from Dr. Michael Fratantoni of the Mortgage Bankers Association and please focus on 2020 through 2023:
While overall mortgage volume slows as refinancing falls off, simply due to most homeowners having already refinanced recently, the red line that indicates purchase volume continues to grow. In fact, just look at the red purchase line for 2021 and compare it to any year going back to 2000. This will be the best purchase year in two decades, and it only gets better going forward.
So the opportunity here is clear, and facts do matter, but owning a home is more than just facts and numbers. It provides stability for a family to raise their kids in the same schools and neighborhood without leases expiring. Unlike renting, you can paint your home any color you like and you can modify, decorate, and more to fit your family’s needs. You also won’t experience rising house payments in the same way as renting simply because a fixed-rate loan locks in most of your costs while rent rates rise over time.
Yes, we have had many cycles in housing over the decades, but for those that understand wealth creation, demographics, rate cycles, and the confluences that result from these data points, 2021 looks to be a truly remarkable year for the homeowner.
David H Stevens, CMB, is the CEO of Mountain lake Consulting, Inc. Dave served many key industry roles including CEO of the Mortgage Bankers Association in Washington DC, The US Assistant Secretary of Housing and FHA Commissioner, President of Long and Foster, EVP at Wells Fargo, and SVP at Freddie Mac. David is an advisor to the George Mason Mortgage Board of Directors.