U.S. home values soared last year — and Zillow projects a bigger 2021 ahead > PhillyVoice

BY GREG ENGLESBE

When economists look back on the turbulence of 2020 and the profound consequences of the coronavirus pandemic, one area that will warrant close attention is the performance of the U.S. housing market.

A new analysis from online real estate marketplace Zillow puts the strength of the housing market in stunning perspective. U.S. housing gained nearly $2.5 trillion in value in 2020, the highest increase in a single year since 2005.

Homes sold last year at the fastest pace Zillow has ever recorded, pushing the full stock of U.S. housing to a value of $36.2 trillion.

“2020 was a record-breaking year for the housing market with intense competition among buyers driving up home prices. While many faced financial hardships because of the pandemic, others fortunate enough to maintain stable income took a step back to contemplate what they wanted their home to be and hopped on Zillow to help find a place that filled their wish list. Builder confidence, perhaps in reaction to the boosted demand, hit record highs and more homes are being built as a result. Add that together and you see why the housing market gained more than in any year since the Great Recession.” –Zillow economist Treh Manhertz.

The driving force behind the surging U.S. housing market remains the combination of limited entry-level housing inventory and historically low interest rates that have given prospective buyers the impetus to compete for homes while the opportunity is there.

For a variety of economic reasons, there is a growing expectation that interest rates will rise somewhat in 2021. This might normally be seen as something likely to dampen the demand for housing this year, but the climate of uncertainty around when it will happen is instead an unknown that may accelerate housing transactions among those looking to beat the change.

Zillow’s analysts believe home sales will see 21.9% annual growth in 2021, marking what would be the biggest annual sales growth since 1983.

“The optimistic outlook is due largely to the enduring strength of the market today, even through what is typically a slower season for home sales, and demographic factors that indicate demand will remain strong,” the company wrote in a series of predictions late last year.

The top U.S. markets where housing values increased last year were New York City, Los Angeles, Chicago, Dallas-Fort Worth and Philadelphia, according to Zillow data.

While all of these indicators are positive, there are some areas of concern that remain to be considered.

A substantial share of the demand for homes is coming from Millennials who want to establish roots. With home values continuing to rise and competition steep, low interest rates may not help those who are getting priced out of a market that has too little of what they need — affordable starter homes.

And when interest rates eventually rise, that will make the margin of affordability a bit slimmer.

“Don’t expect a few more basis points on 30-year mortgage rates to bring demand crashing to a halt, but it may end up pricing out some buyers already struggling to get onto the homeownership ladder — especially for first-time buyers who don’t have access to funds from the sale of their current home,” Zillow wrote among its predictions.

It’s clear that the U.S housing market is operating at an impressive clip. That momentum will likely continue this year, but it will be interesting to examine more closely where and how that happens. How will larger societal forces in the COVID-19 recovery shape the housing market? Will cities see an uptick in sales as people feel safer committing to areas that presented greater risks during the early days of the pandemic?

The unique combination of economic and demographic factors at work in the U.S. housing market are sure to make for a fascinating year.

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