Miriam Moore is the President of Default Services at ServiceLink, a provider of transaction services to the mortgage and finance industries.
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The housing supply in the U.S. has been closely monitored for decades. There have been ebbs and flows, but we’re currently experiencing one for the record books. The pandemic certainly contributed to historic lows, but there are several other mitigating factors that have led to the lack of nationwide inventory. However, the good news is that this shortage can’t last forever. That means now is the time for investors and buyers to plan for the future, when the tide finally turns.
Let’s take a quick look at how we got here. Seasoned real estate agents will tell you that housing shortages typically occur when there is less than six months of inventory on the market. As of December 2020, there was only a 1.9-month supply of homes. To combat this shortage, Freddie Mac estimated the market would need to add another 2.5 million properties to potentially balance out the gap between supply and demand. These factors produced a strong seller’s market, which drove up prices across the country. The Case-Shiller Index shows home prices jumped from 7% to 19% from September 2020 to June 2021. For obvious reasons, income growth didn’t rise as sharply, which ultimately priced many families out of the market altogether.
For would-be buyers who turned to the rental market instead, they found much of the same. According to Arbor, rental prices spiked year-over-year, and occupancy rates rose to 95% in the second quarter of 2021, the highest level since the mid-90s. While both of these statistics are great news for investors, it’s an increasingly competitive market for potential renters.
Representing more than 15 million units, single-family rentals (SFR) play a prominent role in the overall housing supply in the U.S. A recent State of Homebuying Report commissioned by ServiceLink, the company I work for, found that 32% of survey respondents bought an investment property over the past two years. This is a segment that is positioned to grow due to the need for more rental properties and the influx of institutional investors that have entered the space over the past decade.
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So, what has the potential to shift the market and create a more balanced housing supply? We’re already starting to see it. Slowly, more inventory is organically being added to the MLS. That is helpful, but investors may also want to keep an eye on what’s happening in the default space.
There are currently about 1.6 million homeowners in some phase of the forbearance process. More than half (850,000) will be exiting forbearance between now and the end of October. That will leave these homeowners with important decisions that could impact the housing market. While many will likely seek to resume their mortgage payments or modify their loan, others may try to take advantage of the market and sell their homes for top dollar.
Additionally, foreclosure starts are on an upswing with the expiration of the government moratoriums. Homes that were in foreclosure prior to the pandemic will be the first to go through the process. While all of these distressed properties will not end up on the market, there could be a trickle-down effect that works in tandem with the stabilization of economic factors. While I don’t anticipate a large rush of foreclosures or anything similar to what we experienced in 2008, the number of defaulted properties that end up on the market will gradually build over time.
The U.S. housing market is complex, and there’s no crystal ball to accurately predict what will happen next. However, over the next 12 to 18 months, here are some areas to watch closely as they may offer clues to the trajectory of the market.
• Interest rates: This will determine whether the hot seller’s market continues, cools off or becomes more stable. Current low-interest rates are highly favorable for buyers and investors but may not be as enticing if rates start to increase in the future.
• New construction: Skyrocketing lumber prices and supply chain issues this past spring put a dent in the affordability of newly constructed homes. The average cost of a new construction home rose by about $36,000 as a result. Lumber prices have since dropped significantly, but now it will be on the developers to pass that savings along to buyers.
• Selling at auction: This is a particular favorite among investors due to the advances in technology in auction platforms. In most cases, buyers do not have to be physically present in order to bid; therefore, investors can add to their portfolios more easily than ever. I anticipate more properties being sold at auction, which has the potential to boost the SFR market.
As we close out 2021 and look ahead to the new year, I suspect housing demand will remain high, barring any sudden economic shifts. All things considered, it could take some time before we start to see a more balanced market.
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