Remote work and low interest rates expand geographic desirability
By Patrick Duffy
During times of great social and economic turbulence—such as during a pandemic—slow-moving trends tend to accelerate further, often bringing about changes which remain in place long after most things have returned to normal. In the case of the Bubonic Plague/Black Death outbreaks of the mid-1400s, the huge loss of life meant a rapid transfer of economic power from feudal lords to the remaining peasants who worked on their lands, which in turn gave them higher wages, more independence and a higher quality of life.
While today’s coronavirus pandemic is unlikely to result in such dramatic changes, we are certainly seeing other slow-moving trends accelerating, including a rapid rise in remote work, online video conferences replacing in-person meetings, a sharp increase in the share of online shopping and a new idea of one’s own home as a sanctuary against a dynamic and changing world. From an economics perspective, there seems to be three different markets operating today: (1) a housing market benefiting from low interest rates and pent-up demand for limited listings; (2) a stock market fueled by a limited number of tech-related superstar companies; and (3) almost everything else.
In the case of housing, home builder confidence hasn’t been this bullish since the end of 1998, with NAHB’s overall Housing Market Index rising to 78 in August and the metric covering buyer traffic rising to 65, thus setting a new record. In an earlier sign of this bullishness during July, annualized housing starts leapt about 23% from both June and the same month of 2019 to the highest level in five months. July permits for future homes rose by nearly 19% from June and 9.4% year-on-year to the highest level in six months as builders try to predict just how long this pent-up demand will last.
For now, inventory for both the new and existing home markets remains under pressure, with the only release valves including more new construction or an increase in resale listings. If a six-month inventory timeline generally indicates a neutral market between buyers and sellers, June’s inventory timeline for new homes (4.7 months), and existing homes (4.0 months) suggest a strong sellers’ market for the indefinite future.
However, even with low interest rates, limited supply and bidding wars usually mean higher prices for homebuyers, which could limit both the breadth and depth of attainable supply at different price points. In June, year-on-year median home prices rose 5.6% to $329,200 for new homes and 3.5% to $295,300 for existing homes, making the typical new home priced just 11.5% higher.
It seems that homes, recently seen as investments, are again being viewed more as private sanctuaries against an often unruly world.
If builders can hold the line on their costs—which is admittedly a challenge when framing lumber prices have spiked up as much as 70% in recent months, adding an average of over $14,000 to the price of a new home—they are set to greatly benefit from the renewed demand for new housing outside of urban areas. Still, as of the second quarter of 2020, 59.6% of homes sold during this period were considered affordable, down from 61.3% the previous quarter and the lowest reading since the end of 2018.
Importantly, this renewed demand seems to be pulling from more than one demographic group, whether it’s engaged millennial couples trading big weddings for down payments on homes, Gen X breadwinners finally being released from the shackles of a punishing commute as many businesses see increased productivity from allowing remote work, or baby boomers deciding it’s time to find that forever home.
According to the 2020 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors, while millennials may be driving the total number of sales, older cohorts are tending to disproportionately prefer new construction. While buyers of new homes accounted for 13% of all sales, 18% of those aged 65 to 76 and 16% of those aged 74 to 94 bought new homes, often due to preferences for avoiding costly renovations and the greater amenities of many new home communities.
It’s also interesting to note that buyers aged 65 to 73 moved a median distance of 40 miles versus just 10 miles for those aged 30 to 54. Homebuyers aged 40 to 73 are also more likely to put down deeper roots, planning to live in their new homes for 20 years, or double the length for buyers 39 and under. It seems that homes, recently seen as investments, are again being viewed more as private sanctuaries against an often unruly world.