Why Today's Real Estate Boom is Important?
The COVID-19 pandemic has had a gross impact on economic activity throughout the U.S., leaving many industries scrambling to rebuild and recover. However, except for a few initial bumps in the road, the housing market remains relatively unscathed. In fact, the residential real estate market is booming, poised to impact the way people buy and sell homes for the foreseeable future. Real estate market trends point to an explosive year for real estate in 2021 as housing demand continues on an upward trajectory. But skeptics remain reserved that today’s real estate boom may be indicative of a rising housing bubble. Despite the controversy, data suggests this isn’t the same housing market seen in the 2008 market collapse. Instead, housing market trends point to meaningful growth with tangible, long-term effects, making this new housing boom extremely important.
Trends Driving the Current Market
Comparing the current residential real estate and mortgage markets to those at the peak of the financial crisis, it's clear there are some major systemic differences. For starters, one of the factors behind the crash of 2007-008 was because homeowners were qualified to buy homes they couldn’t afford1. There were loose lending standards and borrowers with poor credit or who lacked means of repayment. Similarly, many homeowners put little to no money down when purchasing a new home. Meaning they had very little skin in the game to incentivize them into making their monthly mortgage payments. As the market cratered, borrowers simply walked away from properties that were underwater, resulting in millions of household foreclosures. Fast forward and today’s real estate boom, the current market trends are implicitly different. One example is that mortgages are allowed to borrowers with much higher credit scores. Recent data indicates that the average FICO score in the United States rose to approximately 711 for 20202. This is marginally higher than the average score in 2019, but significantly higher than scores in the late-2000’s2. Larger down payments are also being required, and more consumer protections are also in place to protect borrowers from predatory lending practices. Similarly, new risk-layering technologies are accounting for a variety of other positive and negative factors. Data is driving a lot of the risk-based modeling being incorporated into new automated underwriting systems and loan platforms. In many ways, this is the same way Terrakan empowers clients - by leveraging data and providing a one-stop, integrated real estate development platform. Another reason why the current market is different is that housing supply and mortgage rates are at record lows. As demand for homeownership remains high, these factors will continue to put upward pressure on home prices. While some might consider the market as overheating, the fact remains that more homes simply need to be built. Fortune recently noted that the number of new construction starts has declined by over a third, since their peak in 20063. Lastly, demographics have shifted over the last decade, creating an inflection point sparked in 2020, but that has time to run. As the baby boomers age, millennials become the most significant segment of new home buyers. Reports indicate that less than half of millennials are homeowners. If buying conditions remain favorable, then the market should still see a boost in first-time homebuyers keeping purchase activity high. This is not even taking into consideration new federal legislation proposed by the Biden administration that, if approved, will provide new eligible first-time homebuyers a lucrative $15,000 federal tax credit when buying a new home4.
Reshaping the Industry
In many ways, the real estate industry has had to evolve as a reactionary measure to COVID-19. However, many new changes may ultimately remain as the industry norm. For example, a focus on utilizing big data as an approach to risk seems to be much more prevalent throughout the industry. Things like borrower income verifications and appraisal reports are becoming more streamlined and digitized. Even document collection and initial review can all be done electronically. What was once an industry centered around physical paperwork now has seen successful track records with eClosings and electronic disclosures. The current housing boom has forced industry professionals to stretch the boundaries of traditional practices that will forever change the way someone buys a home or even obtains a new mortgage loan. As new approaches to the home buying process become relevant and consumer confidence continues to grow, homebuyers will remain eager to buy. In fact, buyers are so comfortable that roughly 63% will make an offer on a home without ever physically seeing it. At this rate, traditional brick and mortar real estate and mortgage brokerage firms may be a thing of the past.
Terrakan's Key Takeaways
Real estate trends indicate that the housing market has benefited from impacts brought about by the COVID-19 pandemic. While current drivers may in many ways mimic factors leading up to the 2008 financial crisis, the underlying conditions are nowhere near the same as they were over a decade ago. Demand for homeownership has never been higher, and buying factors have rarely been better. Furthermore, credit standards and lending practices have improved, layering multiple risk factors resulting in a better overall foundation for the market. But today’s real estate boom is not just significant if you are buying or selling a new home. It's also important because it is helping to reshape an industry that was previously indifferent to change and digitization. Borrowers may now find it more flexible and easier to buy a new home or obtain a mortgage through digital means, which should warm more buyers to the home buying process, thereby creating a foundation for future growth opportunities. Sources 1 Friedman, N. (2021, March 15). The Pandemic Ignited a Housing Boom-but It's Different From the Last One. Retrieved April 27, 2021, from https://www.wsj.com/articles/the-pandemic-ignited-a-housing-boombut-its-different-from-the-last-one-11615824558 2 Lembo Stolba, S. (2020, December 08). What is the Average Credit Score in the U.S. Retrieved April 27, 2021, from https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/ 3 Carlson, B. (2021, April 16). No, we are not in another housing bubble. Retrieved April 27, 2021, from https://fortune.com/2021/04/16/are-we-in-a-housing-bubble-covid-real-estate-prices/ 4 Kromrei, G. (2021, April 27). Biden's $15K first-time homebuyer tax credit now a bill. Retrieved April 27, 2021, from https://www.housingwire.com/articles/new-15k-first-time-homebuyer-bill/#:~:text=The bill would provide a,- and middle-income earners. 5 Lerner, M. (2021, January 20). Redfin: Two-thirds of home buyers in 2020 made offer sight unseen. Retrieved April 27, 2021, from https://www.washingtonpost.com/business/2021/02/03/redfin-two-thirds-home-buyers-2020-made-offer-sight-unseen/
Original Blog by Terrakan