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In today’s housing market, it is important to know what is driving consumer decisions. The urgency from home buyers has slowed as some shoppers balk at pricing and others are distracted by normal seasonal activities, but the slight shift has some wondering about where the market stands. We showed a matrix about six months ago to describe the motivations behind the main home buyer groups (first-time, move-up, luxury, 55-plus, investor, second home, relocation, and foreign buyers), and we wanted to use the same matrix to check in on key housing pillars.
Of these pillars, some are evergreen drivers of housing strength and some are more unique to today. We advise tracking these areas over time to identify early shifts or new opportunities.
1. COVID - Related Lifestyle Changes
The pandemic brought about the ability for some to work remotely. This shift alone proved to be powerful to the housing market as people looked to move into a home that better matched their evolving needs. Kastle Systems, a real-time, return-to-office dataset, shows that office occupancy has backpedaled recently as the delta variant spreads. In addition, some companies that were planning to bring workers back to the office following Labor Day have pushed their plans back further, in some cases to 2022.
While more time at home is bad for the office sector, it is good for housing—especially in locations that were a harder sell when people were commuting five days a week. Zonda data verifies that sales in the farthest out locations increased over the past year. What we’ve noticed, however, is what we’re calling the “halfback.” Sales farther from downtown areas are still up, but we’ve seen a small shift back toward downtown compared with six months ago.
2. Non-COVID Lifestyle Changes
The most common age range for millennials today is 29 to 31, which corresponds well with this cohort getting married, having kids, and buying a house. At the same time, baby boomers are retiring and many Gen Xers are looking to move up. The combination of all three cohorts actively shopping for homes at the same time has pushed up sales across all price points.
Demographic trends are critical to understanding where demand goes from here and are a main reason to be bullish on housing. However, if housing was driven by only demographics, we would be expecting full steam ahead on growth. We know other factors are equally important, namely affordability and consumer confidence.
3. Great Home Equity
The pandemic and the accompanying housing boom had one massive winner: existing homeowners. Most homeowners saw a huge increase in the equity in their homes over the past 17 months. The pandemic drove Gen X families—specifically those with parents and children working and learning from home—to explore moving to larger properties. This group, initially one of the more scarred from the Great Recession, has become a dominant player in the housing market, in large part due to home equity.
4. Rising Prices
Rising prices have been great for existing homeowners. For prospective shoppers, there have been two main reactions to rising prices: encouragement or fear. Some people see the rising prices and want to jump in as soon as possible as to not miss the boat on further gains. Others find the competitiveness in the market and the rising prices daunting and have chosen to sit on the sidelines. The latter group poses an opportunity as those on the sidelines become future buyers. However, today’s level of pricing is cause for concern, especially in the event of rising mortgage rates.
5. Fear of Missing Out
The fear of missing out (FOMO) mentality hit new highs throughout the pandemic. People saw their friends rushing into the housing market, and that led to others wanting to rush into the market as well.
The pop-in demand hit when both low interest and low inventory also pushed prices up. As of late, builders report that the urgency of buyers has diminished, and the FOMO mentality is off of cycle highs. Some buyers have shifted to expressing concern that they are buying at the top. Scars from the Great Recession are deep even though the drivers of today’s housing market are different than the past.
6. Search for Yield
While most buyers are likely to view housing as an investment, those specifically buying from an investment point of view are of particular interest. Currently, the majority of builders are taking what they learned in the last cycle and are limiting the number of sales going to investors. Zonda’s latest Division President Survey captures that 73% of builders report that only 0% to 5% of their homes sales are going to investors. On the resale side, mom-and-pop investors combined with Wall Street dollars and companies like Opendoor, Zillow, Offerpad, and Redfin are actively buying homes. These investors are often buying an entry-level product and holding the homes as rentals.
Data from ATTOM shows that flippers, however, are less active than before, likely due to the massive runup in prices limiting potential profit. About 3% of all sales in the first quarter of 2021 went to flippers compared with nearly 9% during the height of the previous cycle.
7. Strong Stock Market
We aren’t in the business of forecasting the stock market, but as it stands, the strength on Wall Street has been important for housing. Those holding equities have seen a huge runup in their wealth; the S&P 500 has grown 80% in just two years. While the concentration of wealth is held by roughly 50% of the population and skewed toward baby boomers, even those not invested in stocks look to the market as a gauge of the economy and the current state is inspiring confidence.
8. Low Interest Rates
Low interest rates have enabled prices to rise by keeping monthly payments reasonable. In fact, home prices grew 18.6% in June year over year, according to the Case-Shiller Home Price Index. But low interest rates can only do so much when home prices are growing at today’s exorbitant levels. For months, the low interest rates kept monthly payments below pre-pandemic levels, but the math is shifting. The monthly payment for new entry-level product is 6% higher than July 2019, 4% higher for move-up product, and 3% higher for luxury. While those numbers still prove the power of interest rates, a combination of rising prices and interest rates are expected to strain affordability.
9. Increased Savings
A top reason consumers cited for not buying a home before the pandemic was a lack of down payment. Those who remained employed over the past year saw their finances improve dramatically. The current personal savings rate of 10% is above the 8% from early 2020 and far greater than the 2% to 4% before the Great Recession.
Nearly every financial housing pillar that drove demand in 2020 is holding up. Despite consumer confidence slightly fading and housing affordability further weakening, overall market fundamentals in both the national economy and housing industry remain strong.