It’s the current, not the waves, that will propel longstanding changes in the American housing market, said Logan Mohtashami, HousingWire’s lead analyst.
How much housing is built and sold; who pays for those units; and how Americans ground their lives in what and where they live: these forces are rooted in societal and family culture and largely impervious to surface turmoil.
The economic disruption caused by the global COVID-19 pandemic, of course, was much more than just surface turmoil. But in the trial by fire of COVID, Mohtashami’s economic models proved incredibly accurate, laying the groundwork for his predictions for the rest of this year and next.
In winter 2020, on the brink of the COVID-19 pandemic, the housing economy was “on an even keel,” Mohtashami said. As early as February 2020, Mohtashami foresaw the potential for the global pandemic’s “butterfly effect” on lowering mortgage rates and how, contrary to most other predictions, we would likely see an economic expansion as a result by the third and fourth quarter of 2020. Then in April 2020, in the depths of the COVID crisis, Mohtashami correctly predicted the timing and shape of the economic recovery, laying out a roadmap in his “America is Back” model.
Panicked prognosticators who forecast widespread disaster for housing were quickly proven wrong when “the leading economic indices bottomed out in April 2020 and have been rising ever since,” he said. The key is a demographic surge of Millennials reaching peak home-buying age from 2020 to 2024, Mohtashami holds, which will provide replacement buyers for housing during these years.
Looking ahead, Mohtashami said that the primary theme of the housing economy through the middle of 2022 will be how demand and supply are shaped by ongoing trends — an epic battle of solid demographics versus affordability. That the industry defied doomsday prognostications as the COVID-19 pandemic that emerged only goes to prove the resilience of the housing economy, he said.
As 2021 rounds the curve, some building commodity prices are settling back to normal, while builders have reverted to their prior habit of pursuing measured growth, said Mohtashami. The most far-reaching effect of the pandemic will likely be the unbundling of housing growth, with two linked trends: young and multigenerational families seeking spacious dwellings and many workers seeking location first, with the expectation of working remotely.
“Americans love big single-family homes,” said Mohtashami. Since 2014, when homebuilders finally shook off the aftershocks of the 2008 housing-led recession and started building a sustainable mix of housing, the average square footage of new houses has been steadily rising. Consistently low mortgage interest rates — despite 2020’s economic spasms — have fueled ongoing demand for roomy houses on spacious lots. As long as rates hold — and Mohtashami thinks they will – there’s no reason for builders to abandon their strategy.
“Housing is primarily driven by primary owners. Don’t fall prey to the bubble talk or the institutional investors,” Mohtashami said.
Housing moves full speed ahead
The entire world paused in March 2020 as governments ordered their countries to stop in their tracks in response to the escalating spread of COVID-19. Mohtashami had just predicted that mortgage rates would stay low, counter too many economists who were talking about a recession. And though he admits that it was impossible to anticipate every detail of the economic and regulatory response, Mohtashami’s April 2020 HousingWire forecast passed the acid test again and again over the last year.
In April 2020 as the economy shuddered and the COVID-19 public health measures stopped many businesses in their tracks, some commentators reliably predicted doom and gloom, inflation and crashes, gleefully anticipating that their most dire predictions were about to materialize.
But in fact, once Americans recovered from the initial shock of the pandemic and consequent public health directives, housing quickly emerged as a powerful stabilizer for the public, the financial services sector, investors and policymakers.
In April 2020, Mohtashami assured HousingWire readers that the year would end much better than it began:
That by September, public health restrictions would start to ease, as modes of combating the virus became imminent.
- Stay-at-home orders would gradually ease
- Swift and coordinated government protections for consumers would insulate millions from cratering credit and escalating debt
- Airlines, hospitality, onsite entertainment and other hardest-hit sectors would signal the ‘beginning of the end’ when they finally revived
- And, bond markets would be the leading indicator of the long-term stability of the housing economy.
Mohtashami wrote back in April:
“On January 20, the first positive test for the coronavirus was reported in the U.S. A month later, the 10-year yield was 1.56%. In all my yearly prediction articles since the end of 2014, I always talked about how the 10-year yield should be in the range between 1.6% -3%. The bond markets correctly and with great speed reflected the oncoming crash of the economy.… An early indicator of recovery would see the 10-year yield above 1% – especially if it got above 1.33%. A range between 1.33% and 1.6% on the 10-year yield is something we should be rooting for, especially if this happens without liquidation selling of bonds.”
By June 2021, he was proven right:
“The 10-year yield rose from 0.52% to 0.99% since August of 2020. That rise told us the economy was in recovery. I proposed that the 10-year would live in a range between 1.33%-1.60% in 2021, and that is what we have seen. I was more bullish than anyone last year but even so, I didn’t foresee the 10-year yield going over 1.94%.”
Why?
With long-term trends unshaken by COVID, 10-year yields revived quickly, in spring 2020. “This is confusing. This is some of the best growth and hottest inflation in the 201st century and the bond market doesn’t care,” Mohtashami said. The market doesn’t care, he added, because 2021’s gyrations in the prices of commodities — especially housing-essential commodities, like lumber and steel — have only temporarily blurred the strength of the fundamental demand for housing.
What about the happy pessimists?
It’s easy to understand how news-buffeted commentators could misread the tea leaves. Daily economic news — and the commentators who whip the news into frothy predictions.
And, predictably, according to Mohtashami, the “I told you so” crowd gathered like regulars at a bar to toast what appeared to be the first signs of a crumbling housing market. The irony is that February 2020 was “the most prolific month for housing data in the prior 12 years,” said Mohtashami, “But the reports we got in March 2020 made everyone forget about that.”
But instead of proving them right, the COVID-19 pause and subsequent boom proved them very wrong.
“You can’t have a housing crash if demand is stable,” said Mohtashami. “And it’s hard to create massive inflation in mature economies because inflation is wage-based and it’s hard to escalate.” He added, “COVID was a deflationary factor.
If anything, a key takeaway from COVID-19 gyrations is that housing continues as economic ballast, especially in an economy dependent on services and information, and decreasingly dependent on inflation-vulnerable goods, he said.
While the recovery inevitably will invoke some additional tremors, the new normal — which is really the old normal — will soon prevail.
“We’re going to get some crazy inflation data because we’ve had a V-shaped recovery,” he said. “It’s going to look crazy for a short time and once it comes back, with normal production, at the end of 2022. A lot of inflationary factors are transitory.”
Demographic destiny
Eroding birth rates in America and globally will gradually and predictably shape the housing economy. At the end of 2020, Mohtashami emphasized to HousingWire readers that demographics are destiny…and U.S. demographics spell steady, reasonably predictable demand.
He wrote then:
“We also got lucky in terms of demographics. If economics is demographics, then the U.S. housing market demographics showed its muscle this year when we needed it the most. I have been talking about the favorable housing demographics during the years 2020-2024 for a long time.
These strong demographics mean we have a healthy number of replacement buyers in America. If people start to move up, down, coast to coast, or state to state, demand should remain stable. The best housing market is a stable one. The next few years’ challenges will be demographic-driven demand vs. affordability when mortgage rates rise.
The one downside of the 2020 housing market is the rapid home-price growth. My biggest concern for the years 2020-2024 was that home-price growth would accelerate to an unhealthy 4.6% plus nominal growth level. I hope that as the economy recovers, bond yields will rise. Higher bond yields will result in higher mortgage rates and cool down the market, as we saw in 2013-2014 and 2018-2019.
However, as long as COVID-19 is with us, the economy won’t run at full capacity, keeping the 10-year yield under 2%. The take-home lesson from 2020 is that demographics and mortgage rates drive housing, and these two factors are at the best levels for housing in our history.”
Last year, COVID responses “kept rates lower than normal,” he noted. “Without COVID, mortgage rates would be around 4% and that would cool the market, so buyers would have more choices. Now, it’s like the Hunger Games, but we’ll probably end 2021 with home sales just a little higher overall than 2020, due to a raw inventory shortage.”
Because of the covid recession, it has kept rates lower than normal. The pandemic only underscored the evolving effect of demographic currents on the housing market, Mohtashami said. In mid-2021, rebounding employment and rising wages converged to refuel space-seeking suburban and small town housing sales. Lenders refused to compromise loan requirements throughout, which means that even the 2020 burst in home values is likely to prove out, Mohtashami said.
“If we get a 25% rise in nominal home price gains in these five years, we’ll be okay,” he said. “Right now, prices are rising because of a shortage, not because of demand. And the purchase application data from 2002 to 2005 looks very different from 2014 to 2021. Credit is sane and mortgage debt is limited. These are very good home buyers. Their debt payment to income [ratio] is low because interest rates are low and wages are rising. They have equity.”
Indicators to watch
Already, indications are that rising wages, the potential for remote work and widespread demand are converging to affect affordability. The National Association of Realtors reported in April that the housing affordability index stood at 155.8, a steady decline since January 2021, when it stood at 186.
Over the same period, the price of a median-priced existing single-family home grew from $308,000 nationally to $346,200. Meanwhile, the qualifying income to buy the me-dian-priced house escalated from $48,528 to $56,832.
The drive to remote work — now widely predicted to permanently realign the workforce — looks like it will hard-wire demand for small towns and developing suburban rings. And while builders take the long view — aiming for steady, not spectacular — growth, said Mohtashami, the housing economy will be steadied by moderate demand and even more moderate supply.
According to the Centers for Disease Control, the American birth rate is slowly eroding, which means that smaller families have more options for how much space they want, where that space is located and how they use that space.
Multigenerational living might rebound a bit, said Mohtashami, especially in the wake of the pandemic, when adult children returned to their parents’ homes for both economic and caregiving reasons.
“Variations on the multigenerational household will continue to support the sale of larger homes,” he said.
And the pandemic will only reinforce many older Americans’ determination to live independently in their houses as long as possible, said Mohtashami. The much-predicted burst of turnover expected by baby boomers abandoning their houses for carefree senior residential facilities has failed to materialize.
According to AARP, by 2030, all baby boomers will be 65 or older. They will then comprise 19% of the American population, compared to 13% in 2010. The widespread failures of nursing homes and, to a lesser degree, senior residential complexes, to shield residents from the COVID-19 pandemic have tarnished the appeal of large-scale senior housing. If, as indicators seem to predict, more seniors re-invest in their single-family homes to stay longer, the housing market will rely even more on new building to meet demand.
It’s past time, said Mohtashami, to retire the hope that baby boomers will exit the single-family housing market in time to turn those houses over to Gen Y grandchildren now forming households. “The peak was supposed to be in 2015,” said Mohtashami. “COVID-19 might actually undermine this purported ‘silver tsunami’ even more.”
This feature was first published in the August issue of HousingWire magazine. To read the full issue, go here.
