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A New Age of Housing

Editor's note: This story originally appeared in the December edition of MReport.

Picture this: It’s 2030. The last of the millennials are reaching their early 30s. In the previous 10 years, millions of first-time homebuyers have purchased homes. Looking back, it has been a big decade for homebuilders, as well. At the beginning of the decade, builders struggled with catering to first-time homebuyers and understand-ing how to meet their unique needs at an affordable price point.

The last of the millennial homebuyers will be buying first homes and getting their first mortgages completely virtually, just like many shoppers today are buying groceries on Amazon. In the housing market, there are vast platforms for homebuyers and sellers, allowing them to view properties, chat with owners, make offers and counteroffers, close the mortgage, set move-in dates—all online. The experience of homebuying and selling in the preceding 10 years has been transformed by technology. These buyers are saying goodbye to their single-family rental homes that are professionally managed and owned by large institutional investors. Renting has become a choice, instead of a necessity for some. A wave of renovation has also swept the country. Appliances, roofs, and structures of the past decade have been replaced with brand new items.

How can this be possible? The answer is simple ... 2020. This past year has brought the industry—and the world—many events that no one could have predicted. These events—from a global health crisis, to a recession, to an election—all significantly affected the housing market. However, over the next 10 years, the housing industry must deliver in these areas: access to home-ownership for the new generation through expanded housing supply, a digital homebuying and selling experience that can be done in a few clicks, an institutional single-family rental industry that delivers a superior living condition for renters, and revamped housing stock through renovation. While challenging, they also will bring significant rewards and opportunities for companies, investors, renters, homebuyers, and housing industry employees.

A Market Moving Toward Recovery

The COVID-19 pandemic and resulting uncertainty ushered in a recession that significantly affected the housing market. Many homeowners were fearful about the stability of their incomes and had to consider what their options were if they could no longer afford their mortgage. In the same way, buyers were fearful about whether they would be able to purchase a home during a recession. However, this recession resulted in a V-shaped rebound, meaning the housing market took a slight dip then made a rapid recovery.

Home sales in February, May, and September tell the story at three different points in the pan-demic. At the end of February, the seven-day average number of confirmed COVID-19 cases was under 20. That month, 5.7 million homes were sold in the United States. At the end of May, the first wave of coronavirus peaked, and the seven-day average number of confirmed cases was over 21,000. That month, 3.9 million homes were sold—down over 30% from February. At the end of September, the seven-day aver-age number of confirmed cases was over 43,000, and 6.5 million homes were sold that month—the highest number since 2006.

What does this rapid turn-around tell us about the housing market? It tells us that people have more appreciation of the value homes offer once the pandemic hit: in times of crisis, homes are shelter, office, classroom, restaurant, movie theater, gym, convention center, hospital, and more. After the pandemic, it is likely that homes will retain some of the increased functional value they gained during the pandemic, and that may result in a discrete jump in housing demand and value. This lesson will likely have a significant impact on first-time homebuyers. One of the most telling statistics during the pandemic is the jump in home-ownership rate in the second quarter: it increased by almost four points from a year ago to 67.9%, the highest level in 12 years.

The Single-Family Rental Surge

According to Pew Research, about 40% of American households rent instead of own. These households either could not afford a home yet or chose rental properties instead of purchasing for mobility reasons. According to the Census Bureau, renters tend to have lower-incomes, less wealth, and are younger and more likely to be minorities. Some might expect to move for jobs or to be closer to family and do not want to be tied to a specific property. Some also might be expecting to upgrade homes quickly and may not want to buy and sell in quick succession. Younger generations also are a big market for single-family rentals, as many are either unable to buy or not ready to settle down yet.

The rise in popularity of single-family rentals holds great promise for improving the living condition of renters. With more landlords being mom-and-pop investors, everyone’s experience with rental houses depended on their landlord. If your landlord was communicative and handy, you probably loved renting a home. However, if your landlord was unresponsive and unsympathetic, rentals probably came across as a bad option.

Starting with the 2008 financial crisis, institutional investors entered this sector with the ability to provide more choices and services to renters, as well as the option to rent-to-own. Because of their scale, when it comes time to relocate, the same landlord may be able to identify the next property and let the renter decide the move date without paying rent or mortgage twice. According to John Burns Real Estate Consulting, 10 companies have accumulated just under 300,000 housing units and are still growing. While still small in the overall rental market, these companies are massive compared to the traditional mom-and-pop investors and have the resources to be able to provide a superior experience to renters.

Bridging the Digital Divide

The way people buy and sell homes has been revolutionized by technology firms that specialize in providing financial services directly to consumers or providing tools, services, or infra-structure to existing financial services companies. These firms are collectively called fintechs. While these companies existed prior to 2020, the COVID-19 pandemic and resulting stay-at-home orders have created a unique environment that has accelerated the growth and adoption of tools like Zillow, Redfin, OpenDoor, and Realtor.com. For example, the traffic to Zillow’s mobile apps and websites increased by 12% in Q2 to a record 218 million average monthly unique users. The move is not limited to the housing sector but applies to the entire fintech sector. According to The Economist, mobile-banking traffic was up by 85%, and online-banking registration by 200% in April.

The COVID-19 pandemic has created a necessity to adopt digital banking, and that trend also included the housing sector. In the mortgage sector, sharply lower interest rates since late-February have generated a historical surge in refinance volume that stretched the capacity of the entire industry and created opportunities for technologies that offer elastic capacity to lenders. These services were instrumental in keeping the market moving during the pandemic.

There is no need to meet face-to-face with a person or conduct any business outside the home. Users can view homes online, ask any questions, and view all the home data without going anywhere. These tools make transactions easier because of the availability of online home data. Being able to buy and sell online was critical for keeping the housing market moving during an event that had the potential to bring the market to a devastating halt. Homebuying and selling, like other commercial activities such as grocery shopping and equity investing, will become digital, bringing lower costs and greater convenience to consumers and more business opportunities to the housing industry.

A New Approach

The period between 2009-2020 has been the slowest housing recovery on record for homebuilders. Historically, the industry has delivered around 1.5 million new homes a year on average to home-buyers. However, 11 years after the trough, the market remains below that important milestone. Builders have learned to be profit-able with low volumes, but can they build more? Rising demand and home prices give us reason to be optimistic. Higher home prices give builders the incentive to undertake large capital investments to scale up, hire workers from competing industries, and pay top price for materials such as lumber, and to buy land.

Two other revolutions will also prove important. As working from home increasingly became the norm, commuting became less of a constraint. More people moved to the suburbs, where it was cheaper to build new homes and where land is more plentiful. We will also likely see an increased use of modular building techniques, which will allow builders to standardize much of the construction process. This not only cuts down on costs but also helps ramp up productivity and improve quality. Just as builders learned to be profitable in a de-pressed market, they will learn to be profitable in a bigger market.

Whether you’re buying a first home, looking online for an upgrade, waiting for a new home, remodeling what you have, or simply looking for a rental, the way people find and afford homes is changing. No matter the individual need, the priority is getting into homes.

Though the 2020 pandemic posed a threat to housing, it has sparked some important change in the industry and this change will bring a new approach to housing in 2021.

About Author: Tian Liu

Tian Liu has served as the Chief Economist for Genworth Mortgage Insurance Corporation since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He authors the company’s Weekly Economic Report and provides regular updates on housing and mortgage markets. Mr. Liu began covering the U.S. housing market in 2007. His commentary on the housing market has appeared in the Wall Street Journal, New York Times, CNBC, Washington Post, and other notable publications. Mr. Liu has a Masters in Economics from the University of Chicago and an undergraduate degree in Economics from the Australian National University. The statements provided are the opinions of Tian Liu and do not reflect the views of Genworth or its management.
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