2021 Real Estate: Is Now a Good Time to Buy?

Since March 2020, demand for homes has skyrocketed and supply has shrunk to historical lows. Combined with all-time low interest rates, the real estate market is definitely “hot” by any measure, which generally means tough for buyers and great for sellers. That guidance still applies, but what we are seeing is not a natural economic cycle; there are a lot of influences on inventory and prices. The usual advice is not to try to time the market, but this is anything but a usual market. I’m not sure I have the perfect take here (anyone who says they do should be Ubered to an asylum), but I believe RIGHT NOW it is not just a bad time to buy, but a terrible time to buy if you can wait 6-24months; and peak time to sell if you are planning to do so in the next 5 years.

Facts change quickly these days: Presidents, vaccines, new strains, China, Iran, insurrections. It’s impossible to predict the future, but this is how I read the tea leaves as of mid January 2021.

Current demand drivers are mostly temporary:

• People on average have way more cash on hand than before covid. This is the most important phenomenon to understand.
• People have more net income, on average. CARES stimulus increased unemployment, incentivized and loaned $ to businesses to continue paying employees.
• Reduced expenditures: childcare becomes in-home, cooking at home instead of restaurants & bars, costs of commuting eliminated (gas or transit).
• Elimination of discretionary spending: hotels, amusement parks, movies, air travel, cruises, casinos, new cars, etc etc.
• This is TEMPORARY, but continues as long as government continues new stimulus packages.
• Some people need to move urgently (e.g. family of 4 working and schooling at home in a 2BR apartment). This urgency adds a premium to what they are willing to pay.
• This creates acute, simultaneous demand on particular types of residences: 3-4BR homes. Less on condos.
• This is TEMPORARY, as people either have made their moves or have adapted in other ways; also, as kids return to schools, it quickly reduces this urgency.
• Company policies quickly and simultaneously shifted to permit remote work.
• This decreases demand near cities but increases demand in high quality of life areas, like Tahoe.
• It happened all at once, instantly creating large demand at the same time. It’s very unusual to have a change that big happen across so many businesses across so many geographic areas.
• This is mostly PERMANENT. Jobs that do not require presence will stay that way. However, the policy changed just once and won’t likely create more demand in the future, so its impact diminishes over time.
• Interest rates are the lowest they can realistically be. This has an effect of increasing demand and prices: people can simply afford to pay more in total. They can extend offers above listing price more frequently, creating bidding wars.
• This is mostly TEMPORARY, but the Fed indicates rates will be acceptably low for a long time (I think at least 2-5 years).

Current supply limiters are mostly temporary:

• Older people, who are disproportionately homeowners, don’t want to have their homes toured due to covid. So they are waiting to list.
• Vaccine and lower case counts will allow them to list their homes again. There is a backlog of supply building up from people who would have sold last year.
• This is TEMPORARY. When it becomes comfortable to list again, the floodgates could open.
• Home construction was interrupted for several months & materials costs went sky high due to supply line disruption. This further limited housing supply by delaying its availability.
• This is TEMPORARY. Construction is back on track and materials costs are coming back to normal.
• Eviction moratorium & mortgage forbearance keeping homes off the market, COVID-related or not.
• Landlords cannot evict renters for nonpayment of rent right now. Many landlords are freaking out because they aren’t receiving rents, and would normally lose their homes to the bank if the rent payments aren’t covering the mortgage.
• Landlords can forego mortgage payments for a year (to mid 2021), and likely longer with a new Biden stimulus package.
• This keeps homes in the hands of owners who cannot truly pay for them, artificially suppressing supply of homes entering the market.

Demand will stabilize and Supply will loosen up:

• The effects of all the temporary influences above will reverse this year.
• Retiring boomers. I suspect a lot of Baby Boomers, who are starting to turn 70, whose jobs were suspended or eliminated, will take this time to enter retirement and soon change their living situations.
• Boomers who were working in 2020 are unlikely to re-enter the workforce when the economy re-opens.
• COVID caused a lot of people to reflect on important things like family and quality of life. May trigger downsizing (cashout) to better enjoy the rest of their life, or relocating closer to grandchildren or to retirement communities, freeing inventory.
• Boomers may end up more permanently actively caring for their grandchildren. Consolidation to multigenerational households means more inventory.
• COVID deaths affect older generations more severely.
• This is an unsettling topic for many reasons, but it is a fact that older folks tend to be homeowners and COVID is a mass death event disproportionately affecting them.
• The past and continuing future deaths will cause widows to change their living situations (downsizing), or inherited homes to be sold, in any case adding to housing supply over the next 1-2 years.
• The impact on inventory could be dampened if these homes are inherited and rented out instead of sold to new owners.

A note on home (and asset) prices

Many analysts are debating the inflationary effects of $3+ Trillion dollars of stimulus. Or $6 Trillion, or $12 Trillion or whatever we end up with. Many say it will not cause inflation, because a gallon of milk will still cost $3.69. There are some who believe it is more important where this stimulus money lands after its first circulation when takes care of immediate debts (like paychecks, or rent payments). Because our economy is set up in a way such that the 20% of the wealthiest people vacuum up all the free money in the economy, I believe those dollars will land in short order in the hands of the top 20%. Because there are few places to stash money with a useful rate of return, the stimulus money is essentially going into Assets — things that people perceive will hold and/or increase in value over time. The big ones are homes, stocks, and bitcoin. I am not an economist, so whether to call this inflation or not is not my call. But I do think we are seeing inflation of values occurring in some segments of the economy without occurring in other parts. This asset inflation has driven asset values through the roof.

What does this mean for home prices? They go up. When it is time to buy a home, it may make sense to stretch your idea of what the value of a home is, because you are conditioned to evaluate in “today dollars,” not the future dollars the asset owners with all the money are playing with.

In other words, that home doesn’t cost 217,000 gallons of milk, it only costs 970 shares of Tesla stock.

I’m thinking the first half of the year is bad time to buy (at least in my areas), but I could be wrong.

1. Many people oddly have had better cashflow over the past 9 months than they did in the months prior. Consider unemployment checks, no vacation spend, low gas/commute spend, lower car maintenance. If one or both partners got laid off, there’s no need to pay for any childcare. It’s very unevenly distributed, but I suspect many have seen their increased savings and suddenly have enough for a low % FHA down payment.

2. More buyers are moving because interest rates are low. Inventory is getting drained and not being replaced. Older folks don’t want germs in their homes so they aren’t listing. So prices are rising. Gotta be careful, because FOMO is how mistakes are made.

3. People who WFH with kids schooling from home need space like yesterday. In addition to the above, these are driving demand especially outside of cities. Supply side is acutely unprepared for this sudden demand, but it will pass.

4. Renters were given a moratorium on evictions until Jan or Feb 2021 which means renters affected by covid-19 need not pay any rent from approx Mar – Dec. That’s a lot of money that will be missing from landlord balance sheets. What happens then is anyone’s guess, but probably… evictions happen.

5. Landlords were given mortgage forbearance of 180 days and can extend for another 180. This will prevent some defaults, but will mostly spread the pain of defaults across several years.

4 & 5 are the biggest questions. I feel like politicians shifted the economic trainwreck to next year.

Appraisal lags the market due to its dependence on comps.

At least 6 things I can see moving the market quickly:

• Low rates lead to urgency due to FOMO. Fed will probably keep these low for a long time though.

• CARES unemployment & loans bridged the pay gap enough that people have more money at this moment than they would otherwise (with no added unemployment). So the negative economic impacts of covid job losses are being deferred until later, likely smoothed over time rather than acutely at once. This will catch up to the housing market at some point.

• Lack of outlets to spend money. People can’t spend on movies, big vacations, amusement parks, eating at restaurants, etc etc. Expenses on gas, maintenance or need for a new car dropped. Housekeeping costs went to zero. Childcare expenses dropped to zero. All other things being equal, people have far more savings for that down payment and maybe stretching a little higher on that bid. Many even feel much richer than normal. (Crazy I know, inequality gets even worse. Maybe irreparably worse.)

• Companies shifting to remote work loosens up where some people need to live. Commute time used to be a huge consideration, no longer is. Some companies are going permanently remote but I would think this will slow and reverse when city life is attractive again over 1-5 years.

• School & work from home. It has everyone looking for larger and more comfortable space simultaneously. More home offices. More yard space. It’s driving inventories for those kinds of more comfortable spaces down, which causes buyer competition to rise.

• New construction was temporarily halted due to covid restrictions, and still delayed due to ongoing supply shortages. This further limits supply.

If you can’t tell, I believe most of these drivers are temporary. Some trends like prioritizing quality of life over work will stick around, and I can’t see significantly higher interest rates for a decade. But covid-related drivers should weaken next year and the deferred economic damage will pull prices back.