Despite the coronavirus crisis (and in some ways because of it), the housing market boomed last year. Although home-buying briefly paused last spring when the coronavirus first hit, ultimately 2020 was a record year for residential real estate. And despite the recession triggered by the pandemic, home prices have continued to rise in early 2021. In short, the housing market has emerged as a pillar of support for an economy still in recovery mode. Will that support continue—and what does the answer potentially mean for your financial plan?
Why Did The Housing Market See Its Highest Pace Of Growth Since The Housing Boom Of 2006?
Although millions of Americans were laid off or furloughed last year due to the pandemic, that didn’t stop house hunters from buying homes in record numbers across the country. As a result, the housing market saw its highest pace of growth since the infamous housing boom of 2005 and 2006. I say infamous because, as everyone now knows, that boom was driven by reckless lending in the subprime mortgage market. The 2020 boom, on the other hand, was driven by high demand and record-low mortgage rates. And both of those factors, of course, were driven by the coronavirus crisis. Fact is, the housing prices had already started to rise before the coronavirus, but the pandemic turbocharged the trend from single- to double-digits. This is another reason why it is important to know The Importance of Financial Literacy During the Coronavirus Pandemic.
Overall, the housing market has seen record-breaking growth since last June, which is when most areas of the country began reopening their economies after the lockdown. And prices have continued rising month after month, showing the resiliency of the housing market even in the face of the ongoing recession.
In many ways the housing market has performed a lot like the stock market during the pandemic: far outpacing economic recovery overall, and for similar reasons, including low-interest rates. One strong indicator this trend will continue is the fact that demand for homes is still outpacing supply. As a result, home prices could continue to climb in 2021—provided, of course, no other issues arise that cause the current boom to go bust.
Is The Real Estate Market In A Bubble?
The question of whether the housing market will collapse this year hinges on whether what we’re seeing is a housing “bubble”. A bubble in any asset class is defined as “a run-up in prices driven by high demand, exuberant spending, and speculation”. Bubbles, by their very nature, are destined to burst, just as the 2006 housing bubble did with disastrous results. And the current housing boom does have some characteristics of a bubble, such as being fueled by high demand.
Beyond that, however, most experts agree the current housing market is not a bubble, but rather another example of how the pandemic has strengthened and accelerated an economic trend that was already underway. Other examples of this include home shopping and telecommuting, and advancements in communications technology. The acceleration of these trends has helped certain businesses and economic sectors thrive during the pandemic, just as the housing market is thriving.
Ultimately, the current housing boom is widely expected to keep booming, at least for the rest of 2021—and there is more evidence to support this theory. For one thing, we haven’t seen the kind of overbuilding that usually precedes a bust. Nor have we seen a big relaxation in lending standards, and certainly not the kind of reckless lending practices that led to the historic 2007 housing market collapse. Of course, even if the current boom isn’t a bubble destined to burst, that doesn’t mean there aren’t factors in place that could significantly deflate it by the end of the year.
How Does Inflation Impact The Housing Market?
One of these factors, of course, is rising interest rates. Mortgage rates are loosely tied to the yield (or interest rate) on the 10-year Treasury note. That yield has been rising since the start of the year and rose sharply in February. The spike suggests investors are becoming worried that stronger economic growth overall—triggered by the expanding Covid-19 vaccine effort and more federal stimulus—will lead to inflation.
That’s troubling where the housing market is concerned because the combination of rising rates and rising home values could price some potential buyers out of the market during the all-important spring sales season—and beyond. Rising interest rates also triggered some nervous volatility on Wall Street in February. Could we see more of that if rates continue creeping up in the months ahead? If so, what might that mean for the housing boom?
How Can The Stock Market Impact The Housing Market?
Buying a home is one of the biggest financial decisions there is, and people are less inclined to do it when they’re worried about their 401k and other investments. A stock market downturn could trigger that kind of worry among potential homebuyers and put a drag on the housing market. And that, in turn, could increase Wall Street’s worries and deepen the downturn, creating a classic vicious circle. With that said, what are the chances for another significant stock market correction, and what— in addition to investor fears about rising interest rates and inflation—could possibly trigger it?
Well, for one thing, there’s a possibility that by mid-year, Big Investors could shift their focus away from the current recovery and toward President Biden’s broader economic policies. These, of course, include things like more regulation and raising the corporate tax rate, which could slow or reverse the recovery. That has the potential to trigger another market correction, and some analysts believe it will. While that may not be enough to cause the housing market to go bust, it could, again, certainly deflate it. And that, in turn, could then feed into Wall Street’s fears and drag the market down further. The bottom line is this: bubble or no bubble, anything is possible in today’s financial markets.
Is It A Good Idea To Downsize In Retirement?
If you’re like millions of other Americans, your retirement plan may include selling your house and downsizing. People are wondering How Much Is Needed to Retire in 2021. Obviously, that plan benefits greatly from a booming housing market. In fact, if your plan was to sell within the next few years, it might even make sense to move your timetable up to take advantage of the current market. The right financial advisor can help you make that decision by examining it alongside your retirement goals and your broader financial strategy. They can also help you identify other potential ways to take advantage of today’s markets and help make sure you have a portfolio that’s aligned with your personal risk tolerance.
As I’ve noted in previous blogs, regularly reviewing your risk tolerance with your advisor is extremely important—and the current housing boom offers a good example as to why. Today’s economy might be best described by a line from Charles Dickens: “It was the best of times; it was the worst of times.” On the “best of” side, you have a soaring stock market and the best housing market in 15 years. On the “worst of” side, you still have high unemployment and millions of businesses struggling to recover from the coronavirus recession—and wondering if they even can.
Amid this uncertainty, it’s more important than ever to know: Is your current strategy designed to help protect you enough from potential risks, or could you take steps to help protect yourself further? Or, would you like to make changes to increase your risk a bit to take advantage of potential buying opportunities that may emerge in the months ahead? Either way, the only way to know for sure is by reexamining your strategy with the help of the right advisor—meaning, of course, one who specializes in retirement income.
Schedule a complimentary call with an Income Specialist from The Retirement Income Store® who can help explain the best strategies for you based on your particular situation.
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