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Why demand in the residential housing market is still so high

While many other industries struggled, the residential housing market grew significantly in 2020; in fact, national home prices rose nearly 11% , a very uncommon metric during an economic downturn. The momentum has continued into 2021.

A handful of factors contributed to the housing market’s performance. In a low interest rate environment, people looking for larger homes during the lockdown, and work-from-home arrangements, residential property sales completely took off. Sales have been on an upward trend over the past year, and do not appear to show signs of slowing down any time soon. The U.S. housing market has seen a 1.6 million net increase in homeowners since first-quarter 2020, according to Pew Research.

Factors contributing to the high demand residential housing market include:

  • Low interest rates (thanks to Fed monetary policy)
    The Federal Reserve kept interest rate low to help stimulate economic growth. This created a golden opportunity for Americans to take advantage of the low interest rates to buy homes. In early January 2021, the average mortgage interest rate for a 30-year, fixed-rate mortgage was 2.65%, which marked its 50-year low. The low interest rate environment contributed to a heightened “fear of missing out” among those who were already considering buying a home.
  • Desire for longer-term remote work
    For those who were given the option to work remotely from home, many employees are now reluctant to return back to a physical office location, if given the choice. This desire to remain home has led some to consider purchasing a larger home to accommodate a longer-term work-from-home lifestyle. These buyers have primarily sought out a larger homes, with more rooms, more square footage, and enough extra space for a home office or gym.

Amid the increasing demand for residential property across the U.S., the housing market has reacted in these ways:

  • Mass relocation to the suburbs
    In a work-from-anywhere world, people are moving en masse to the suburbs, where they could enjoy larger homes and suburban living while keeping their city jobs (and city pay). In fact, sales of large homes were up 21% year over year nationwide in July 2020. While walkability is still a plus for cities, consumer preferences shifted to the importance of personal space while working from home.
  • Low inventory
    Housing supply has not been able to catch up with demand. In April 2021, Freddie Mac found that U.S. housing market demand exceeded supply by 3.8 million homes, attributed to the underbuilding of homes over the past decade. In many regions of the country, home inventory has reached record lows.
  • Rise of digital homebuying
    Safety concerns have bred a movement for homebuyers to virtually “tour” prospective homes, causing homes to sell faster than before. With social distancing requirements and open house restrictions, in addition to some sellers worried about in-person showing, real estate agents adapted with photos and videos posted to Instagram, virtual reality tours and walkthroughs, FaceTime tours, and other digital solutions. This new way of showing homes yielded quicker buyer decisions; reduced legwork means decisions now only require hours rather than days.

 

Housing market projections

The momentum of the housing market has so far carried over from 2020 into 2021. Buyers are still eager to take advantage of low interest rates while they still can. Meanwhile, home prices may skyrocket to new highs this year: Redfin reported that home prices in March 2021 had risen 16.7% year-over-year, and Realtor.com predicts the trend will continue but at a slower pace in the residential housing market throughout 2021. Zillow predicts 2021 demand in the housing market will see an extra surge in major cities and forecasts a 21.9% annual growth of home sales or a total of nearly 6.9 million homes sold by the end of 2021.

Are you in the market for a home? Check out our mortgage loan calculator and give yourself some idea of what your potential monthly mortgage payments could be.

 

 

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This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.

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