Since the year 2000, and particularly following the financial and housing market downturn in 2008 along with the subsequent foreclosure crisis, various elements including population expansion, fluctuations in interest rates, the aging demographic of homeowners and buyers, heightened investor activity in real estate, modifications in tax legislation, insufficient new home development, accelerated listing turnover, and the impact of the pandemic have merged to create an unparalleled imbalance between supply and demand in the real estate sector.
Below is a historical overview detailing the influence of these factors on both buyers and sellers. Understanding this information and its interplay is crucial, in my opinion, for grasping the present condition of the real estate market. Given that history often echoes itself, recognizing patterns enables us to anticipate potential developments within the real estate industry.
1). Understanding the historical economic, demographic, and market influences from the sellers' standpoint over the last 2 decades
The substantial rise in interest rates during 2022 triggered the phenomenon known as the "mortgage lock-in" effect, prompting homeowners to significantly decrease their property listings. They simply hesitated to exchange their existing homes, with low-interest rates, for new ones subject to considerably higher rates.
Furthermore, with the escalation of rental rates and the amplified tax advantages associated with owning rental properties (cf. tax laws of 2017), coupled with the availability of mortgages at exceptionally low-interest rates, a growing number of prospective sellers opted to lease out their properties instead of putting them up for sell.
Even before the surge in interest rates in 2022, which precipitated the unprecedented decline in new property listings, listing activity had been dwindling for years despite growing demand. Presently, over 54% of homeowners are aged 55 years and above, and as individuals, they tend to relocate less frequently and sell their homes less often.
Additionally, as housing prices have soared well beyond inflation rates, the median age of homebuyers has increased by 10 years over the past two decades, reaching 49. Older households, typically more affluent, are better equipped to handle the escalating prices. Consequently, the proportion of first-time buyers, who are usually younger and more prone to moving due to life changes, has dwindled, leading to a rise in the median age of first-time buyers to 36.
As a result of these influences, the median length of homeownership has more than doubled since 2005, significantly diminishing the supply of listings accessible for purchase at any given moment.
2). Understanding the historical economic, demographic, and market influences from the buyers' standpoint over the last 2 decades
Demand experiences fluctuations due to various factors such as interest rates, financial market conditions, consumer sentiment, and housing affordability. However, it's evident that as the population grows, so does the desire for homeownership. Since 2000, the U.S. population has increased by 53.5 million individuals. Despite this, the average monthly count of active existing home listings throughout the year has decreased by 45% over the same period. Consequently, when a larger pool of buyers competes for a reduced inventory of listings, bidding wars intensify, resulting in quicker sales at elevated prices. These higher prices, in turn, oftentimes primarily attract older, more affluent buyers who tend to relocate less frequently.
Since the foreclosure crisis, marked by the sale of hundreds of thousands of homes to institutional investors at significantly reduced prices, coupled with the emergence of Airbnb, amendments in rental-property tax legislation, and the repercussions of the pandemic, investors, both large-scale and individual, alongside second-home purchasers, have constituted a notably larger share of property transactions. This demographic has recently accounted for an average of 14% to 17% of all home sales, encompassing condos and co-ops, and up to 27% of single-family-home sales. Such trends have significantly heightened demand and intensified competition for listings among typical owner-occupier buyers, particularly within a context of limited inventory.
Lastly, new home construction has significantly lagged behind population growth, resulting in a substantial disparity between the formation of households and the construction of new homes, with the gap amounting to millions over the past decade.
The equilibrium between supply and demand undergoes constant fluctuations, ranging from subtle shifts to more pronounced changes, owing to a variety of evolving economic and demographic factors. However, broadly speaking, since the market rebound in 2012-2013, demand has consistently surpassed supply, with the disparity growing increasingly severe. Despite a notable decrease in buyer demand following the rise in interest rates in 2022, the supply of listings unexpectedly dwindled by 2023, renewing upward pressure on home prices.
3). Housing market projections for 2024
3-1). From a macro perspective, many experts concur that the U.S. economy managed to navigate through 2023 without slipping into a recession, largely due to consumers displaying greater resilience than anticipated by most economists. Despite grappling with elevated inflation rates, a banking crisis, and significant layoffs at prominent companies throughout the past year, a majority of consumers maintained a positive outlook, with their confidence showing signs of recovery towards the end of 2023.
Contrastingly, the housing market faced challenges throughout the year, characterized by persistently high mortgage rates and ongoing tight supply conditions. While the Federal Reserve is anticipated to reduce its policy rate this year, they have also suggested that they may delay action until they observe more pronounced signs of inflation easing. The ambiguity surrounding future rate adjustments could heighten interest rate fluctuations in the coming months, although projections indicate that the average 30-year fixed-rate mortgage is likely to gradually decrease to around 6.5% by the middle of the year.
In the latter half of 2024, mortgage rates are anticipated to continue their downward trajectory, potentially reaching 6% by year's end. As interest rates are projected to decrease gradually over the next year, the mortgage lock-in effect described earlier is likely to diminish, leading to an increase in the number of properties being put up for sale.
Additional newly constructed housing units will become accessible as developers accelerate new construction efforts to tackle the ongoing housing scarcity problem. Although supply levels in 2024 are expected to remain below historical norms, active listings could see an increase ranging between 10% to 20% as market conditions and lending conditions steadily improve. The reduced costs of borrowing and the expansion of the housing supply are factors that could incentivize both buyers and sellers to reengage in the housing market during the upcoming home-buying season.
Consequently, prospective first-time buyers who were previously priced out or faced stiff competition in the market last year will make another attempt to achieve their American dream. Likewise, repeat buyers who have surpassed the lock-in effect may also reenter the market as interest rates gradually decrease.
3-2). On a smaller scale, Santa Clara County currently showcases the most dynamic real estate market within the Bay Area. This upsurge can be credited to various factors, including a significant resurgence in pent-up buyer demand, a limited supply of homes, reductions in interest rates since the fall, a boost in consumer confidence, and a growing perception that the Bay Area, particularly Santa Clara County, will lead the way in the upcoming technological AI revolution.
In conclusion, over the last 2 decades the real estate landscape has been shaped by a multitude of economic, demographic, and market influences. These factors have led to significant shifts in both supply and demand dynamics, resulting primarily in intensified competition for limited listings and impacting the behavior of both buyers and sellers.
Looking ahead to 2024, experts anticipate continued fluctuations in the housing market, with mortgage rates expected to trend downward and supply gradually increasing. This could provide opportunities for both buyers and sellers to reenter the market or make their move.