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August 1, 2021

A lot has changed over the last 18 months. A pandemic reeked havoc across the country, infecting over 35 million Americans and putting the economy into a recession that we are still digging out of. It hit an apex in early January and until a month ago was in fast retreat thanks to Americans taking the pandemic seriously and the widespread administration of vaccines. Strangely, the real estate market was not badly affected by the pandemic. While much of the economy had to shut down or adapt, the real estate market seemed to go on almost as if nothing had changed.

One thing that did change was the rate of appreciation of existing homes throughout the country. Housing prices are rising at much greater rates than the historical norms
. New construction prices have risen dramatically as building material prices increased substantially due to pandemic induced shortages. New construction serves as competition for existing homes, so as it gets more expensive it is reasonable to expect existing homes to become more expensive. 

We have an outstanding environment for housing. Employment is near record highs and interest rates are at or near record lows. People have buying power. The wild card is the future, but the crystal ball has become clearer. It appears that the government's efforts this year have been successful at containing the pandemic. Lately, a new much more contagious variant has emerged which is causing serious upticks in infections among the unvaccinated. Should this continue, we may see more restrictions and shortages seep back into the economy. I don't see that it will change the real estate market's trajectory in any significant way. 

As long as the variant does not cause major disruptions, our economy should continue to snap back nicely with minimal long term damage. This should be very positive for the housing market in the years to come. Buyers will be able to take advantage of extremely low rates and relatively affordable pricing. Sellers will see good demand and rising prices for their homes. If the virus mutates to a point where vaccines are no longer effective, our economy will shrink and unemployment will rise significantly again. Pricing could fall and so could the number of buyers. Low interest rates are only useful if you are able to get a loan, and unemployment is not conducive to lending. This scenario could see a repeat of the great real estate recession where investors, with cash in the bank, become the principle buyers. Fortunately, this scenario is not likely to play out.

A good link to see how the crystal ball is doing is here. You can toggle through other countries or other states to see how they are performing. Remember, the trajectory of the pandemic ultimately determines the trajectory of the economy of which real estate is a part.

Interest Rates & Housing Prices

To get an idea on how mortgage rates affect housing prices, look at the table below which illustrates the impact of rising or falling mortgage rates. Let's assume the current interest rates is 3.5%. The table assumes a $200,000 purchase price, 30 year 95% conventional loan, $350 in taxes, $150 in insurance & $100 in MIP per month.

Rate Payment
2.5% $1,351
3.0% $1,401
3.5% $1,453
4.0% $1,506
4.5% $1,563
5.0% $1,620
5.5% $1,679
6.0% $1,739

Most buyers don't look as much at the purchase price as they do the payment, because their mortgage qualification is limited by payment. The table below keeps the monthly payment static at around $1,450 and adjusts the purchase price. Taxes, insurance and MIP are also adjusted as the value of the property changes.

Rate Price
2.5% $214,000
3.0% $207,000
3.5% $200,000
4.0% $193,000
4.5% $186,000
5.0% $179,000
5.5% $173,000
6.0% $167,000

As you can see, interest rates have a significant effect on pricing. Rates for 30 year conventional loans were roughly 3.5% at the low point of this mortgage rate cycle in late 2012-early 2013, summer of 2016, and again in the fall of 2019 and winter of 2020. Rates broke through the 3.5% resistance level later in 2020, bottoming out at about 2.5% just after the new year. You can see a graph by going to the home page of this site and clicking on the "Historical Mortgage Rates" link towards the bottom of the page.

Measuring the Past

Let's look back at how the pandemic affected the real estate market in the metro area. The charts below will give us some insight in what changed and what stayed the same. It may help us chart a pattern for 2021 and help us navigate the year more profitably. So, how about real estate here? Omaha's economy has not been badly damaged. Our unemployment rate, while elevated is much better than the nation as a whole. Buyers are aggressively buying, but they are being thwarted by a lack of sellers. To keep a balanced market you want to see supply and demand move in the same direction. As more households are formed it is important to see new listings rise to meet the increased demand. The trend was moving in the right direction, albeit slowly, until last year.

Five year chart of single family listings in the Omaha area

The number of new listings last year was a bit anemic, and that has continued into this year. With the higher demand and the economy's recovery you would expect to see listings pick up. This is a major factor contributing to the auction like bidding process buyers have to go through in some price ranges. 

Five year chart of single family closed listings in the Omaha area

The number of closings look normal, though elevated from prior years, indicating that buyers are buying and so far there has been enough supply to fuel the sales. That supply is being drawn down as indicated in the Median Days on Market chart.

Five year chart of the months' supply of single family homes for sale in the Omaha area

Months Supply of Homes for sale, which shows the supply of active listings relative to sales, has completely broken down. Normally it vacillates between a month and a half and 2 and a half months. The available supply is less than a month's worth but is starting to improve. Hopefully, this becomes a trend. The chart pattern shows the serious supply shortage we are experiencing.

Five year chart of the days on the market for listings of single family homes in the Omaha area

A truly telling indicator is shown in the Days on the Market chart, which shows the dire shortage of inventory. For virtually the entire year of 2020, carrying into this year, houses sold in less than 5 days. This is almost unprecedented.

Five year chart the sale price of single family listings in the Omaha area

The final chart shows the median price of listings that have sold. Prices have risen at a much greater rate than normal due to the need for buyers to bid over list to be able to get a house. In addition, the normal end of year price decline barely occurred in 2020. Prices normally relax as the year winds down due to slowing buyer activity. Last year the end of year demand did not wane significantly. The rapid rise in the first half of 2021 shows the continued out of balance conditions in the market.

Where does it go from here? If the country continues to bounce back from the pandemic the real estate market should see more inventory come on the market. This should take some of the pressure off buyers as too many buyers are trying to buy too few homes. The expectations of some analysts are that prices in the Omaha area will rise about 10% in 2021. That level of increase will be dependent on inventory levels. I believe that there is pent up demand from existing homeowners to get back to normal and do what homeowners have done for decades, move up or downsize. Builders are also ramping up production, bring more inventory into the market. The pandemic slowed the process down, but with vaccinations comes normalcy and I believe there will be a lot more homeowners itching to list their current properties and get on with their plans and builders heeding the call for more inventory. Inventory will still be tight, but manageable.


To read a discussion on the 2005 - 2010 housing decline please click here.

  August 1, 2021

Written by Mike Salkin, Berkshire Real Estate market analyst.


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