Experts have differing opinions about the fate of the real estate market in the United States. While most have no qualm with the underlying data, there is a divergence when it comes to the market’s trajectory.
Some experts assert that real estate is reaching a bubble that will ultimately burst and could spell disaster not only for housing, but also for the U.S. economy. Trends that mirror those that preceded the financial crisis of 2008 resonate concern.
Conversely, others note that several factors are indicatively different, making the current markets much more solid, stable, and positioned to weather the storm a tumultuous few years. It’s important to understand what factors drive the current market and how they will reshape the future of real estate as we know it.
A Focus on Affordability and Rates
It comes as no surprise that most of the debate about the future of real estate surrounds fundamental economic principles, including supply and demand as well as price. Inventory continues to remain unprecedentedly low, although data suggests the trend is heading in the right direction1. Home prices continue to rise because demand continues to outpace the rate of supply.
Demand for homeownership is currently high (although consumer confidence is wavering). This is because buying conditions remain favorable despite elevated home prices. Mortgage interest rates remain low, and unemployment continues to decrease. In August 2020, home sales were running at an accelerated rate not seen since 20062. Now home prices appear to be overheating, and momentum can only continue if mortgage rates and other metrics remain favorable.
But it seems doubtful that mortgage rates will get much lower, with the benchmark interest rate already between 0%-0.25%3. As the economy recovers, an inverse trend is more likely to occur. The Federal Reserve doesn’t expect inflation levels to hit their target until 2022, and the Philadelphia Fed President has mentioned that borrowers shouldn’t expect interest rate hikes until 20234.
So, if interest rates begin increasing, where does that spell for the market? For starters, demand will probably take a hit which will, in turn, impact home prices. Weaker affordability will likely result in a slowdown. However, corrections are healthy, and a slowdown isn’t synonymous with a market crash. In fact, there are many reasons why rising rates could still mean a solid real estate market.
One reason is that Millennials continue to make up 37% of homebuyers, which is the largest segment in the market at this time5. Additionally, if Congress passes the new homebuyer tax credit bill, which is coined the First-Time Home Buyers Act, it could help launch the market into future growth opportunities6.
Continuation of Stricter Lending Requirements
Lending requirements have been tightened substantially over the last decade compared to the shoot from the hip style utilized by many lenders leading up to the previous real estate market crash. Dodd-Frank, as well as other pieces of legislation, helped reform parts of the financial services industry. Newly adopted disclosure rules and timing requirements provide consumers with more transparency when obtaining a new mortgage loan.
Lenders also use more due diligence when analyzing risk, diving deeper, and making more prudent lending decisions.
For example, additional documentation is required for self-employed borrowers to ensure the solvency and reliability of a borrower's business being able to generate earnings for repayment within eligible parameters. Even extenuating guidance and overlays published by Fannie Mae and Freddie Mac, in response to economic factors brought about by COVID-19, is a testament to a potential paradigm shift in the market.
Similarly, borrower’s credit profiles have also improved over the years. The average FICO credit score among U.S. households is 711, compared to 689 between 2010 and 20117. More qualified borrowers should translate into a more stable housing market for the foreseeable future. Stricter lending requirements mean the quality of loans sold to investors is also much higher. If quality starts to falter, then the market could see significant problems.
Thankfully, the federal government doesn’t appear to be letting up on regulation and oversight anytime soon. If anything, it has remained devoted to renewing its efforts to protect consumers. The Consumer Financial Protection Bureau (CFPB) recently repealed several of the temporary flexibilities it issued concerning COVID-198. The intention is to start normalizing the market back to pre-COVID levels while also preparing lenders for its return as a significant regulatory powerhouse.
Rise of Non-Bank Lenders
A continuing trend in real estate that may go subtly unnoticed by consumers is the slow rise of non-bank lenders into mortgage markets. Before the financial crisis, banks were traditionally the largest lenders as they had easier access to capital.
Over the years, capital became easier to obtain. Many consumers and real estate investors prefer to work with non-bank lenders simply because they were not the most significant player in the space, regardless of whether they had to pay a slightly higher rate.
Non-lenders have had tremendous success over the last decade and have gobbled up market share from traditional banks. The trend has now shifted where bigger banks have begun acquiring smaller non-bank lenders as new subsidiaries.
This trend will probably continue as bigger banks with capital to burn may not want to try and fix or build a compatible platform from the ground up. Instead, they look to acquire companies with the right culture that can scale.
Maintaining the Digital Renaissance
One of the biggest focuses in the industry is the continued adaptation of technology to make processes more efficient and to improve the consumer experience. While COVID-19 was certainly disastrous, it also forced a change in the industry. Realtors, lenders, and investors all had to adapt to the extenuating circumstances at play, which birthed opportunities for the new integration.
Examples for residential lending include the increased reliance on third-party verifications, eClick Sign tools and disclosures, remote closings, and integrating new redesigned consumer applications, IRS forms, and appraisal data points. Reinventing ways data was being collected and used for processing and underwriting. Realtors also had to adapt in many ways, such as relying more on social media and other organic modes of marketing and transitioning from formal physical showings to virtual walk-throughs and video conferencing.
Ultimately, the real estate industry will rely on further adoption of disruptive technologies in the space if it wants to continue to grow at an accelerated rate. The largest share of new homebuyers are folks from younger generations that are technologically savvy. They will expect and demand a home buying and sales process that incorporates major digital aspects.
In many ways, Terrakan is at the forefront of this space by empowering developers with digital tools to allow you to evaluate, expand and manage your book of business. As the environment constantly becomes reshaped, future possibilities for the industry include support for mobile mortgage originations, virtual reality (VR) integration for showing and inspections. New forms of digital payment, such as blockchain, are also rapidly growing their reach.
In fact, some major players are already betting on the future use of blockchain technology, including RE/MAX, which has entered into several partnerships exploring blockchain capabilities, as well as Hilton Worldwide9.
Sources
1 Monthly New Residential Construction, March 2021 (Rep. No. CB21-61). (2021, April 16). Retrieved May 7, 2021, from US Census Bureau and US Department of Housing and Urban Development website: https://www.census.gov/construction/nrc/pdf/newresconst.pdf
2 Olick, D. (2021, March 12). The housing market stands at a tipping point after a stunningly successful year during the pandemic. Retrieved May 7, 2021, from https://www.cnbc.com/2021/03/12/housing-market-covid-one-year-anniversary.html
3 Amadeo, K. (2021, February 18). What Is the Current Fed Interest Rate and Why Does It Change? Retrieved May 7, 2021, from https://www.thebalance.com/current-federal-reserve-interest-rates-4770718
4 Robb, G. (2021, March 03). Fed's Harker sees no interest-rate hikes until 2023. Retrieved May 7, 2021, from https://www.marketwatch.com/story/feds-harker-sees-no-interest-rate-hikes-until-2023-11614806095
5 2021 Home Buyers and Sellers Generational Trends Report (Rep.). (2021, March 16). Retrieved May 7, 2021, from National Association of Realtors Research Group website: https://www.nar.realtor/sites/default/files/documents/2021-home-buyers-and-sellers-generational-trends-03-16-2021.pdf
6 Kromrei, G. (2021, May 06). Biden's $15K first-time homebuyer tax credit now a bill. Retrieved May 7, 2021, from https://www.housingwire.com/articles/new-15k-first-time-homebuyer-bill/
7 Lembo Stolba, S. (2021, February 12). What is the Average Credit Score in the U.S. Retrieved May 7, 2021, from https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/
8 Roha, A. (2021, April 23). CFPB begins cracking down on mortgage servicers. Retrieved May 7, 2021, from https://www.housingwire.com/articles/cfpb-begins-cracking-down-on-mortgage-servicers/
9 CB Insights. (2020, August 17). Blockchain in Real Estate: How This Disrupts the Market: CB Insights. Retrieved May 7, 2021, from https://www.cbinsights.com/research/blockchain-real-estate-disruption/