2020's Legacy and the Year Ahead
Plagues, pyrotechnics, and politics! It's no stretch to say that 2020 did not unfold as expected. Some benefited, many suffered, but no matter how you look at it this has been a year of change, much of it permanent.
Real estate also defied expectations this year and certainly didn't escape change. Let's take a look at the underlying trends driving this change, and what to expect as we turn the page to a new year.
When Covid hit in earnest in early March, I thought I'd be forced into early retirement. The traditional spring selling season was non-existent, but consumer demand quickly recovered, the industry adapted with new technology, operating and safety protocols, and the normally slow summer exploded into the busiest in memory.
Sales: Despite the crash in the early days of the pandemic, total homes sold this year is only down 2.5%, but dollar sales volume is actually up due to an 8.1% increase in median price. In fact, across the 5-county region, the median price topped $1M for the first time in Q4.
Inventory: The Bay Area regularly runs below 3 months inventory, half of what is considered a balanced market. This year, lack of inventory is regularly cited as a problem, but the real culprit is market velocity.
The number of new listings hitting the market in 2020 is virtually unchanged from last year, around 57,500. But the time a property takes to sell is down 36%, from 30 days in 2019 to only 19 this year! It's not quite the great toilet paper shortage of 2020, but most homes are selling almost as soon as they hit the shelves.
Competition: With an estimated 60%-65% of home sales attracting multiple offers, it's not surprising that prices are rising. What might be surprising is that premiums are actually down. Sales prices 8% to 16%+ over asking have been common for years. In 2020 the average sales to ask ratio is at a 10-year low of 4.3%. Of course, this varies by price point, with high-end homes above $3M generally selling for below the asking price.
Despite the competition for available homes, Bay Area buyers are being more discerning with their bids. For sellers, underpricing your home to create a bidding war has become a risky strategy. Today I advise my clients to price as close to the market as possible.
Interest Rates: A key driver to this market performance is historically low mortgage rates. Well-qualified borrowers can get home loans in the 2.5%-3% range, making homeownership accessible to more people, and allowing many buyers to afford larger, more expensive properties. While the Fed doesn't set mortgage rates, its policies have a direct impact. All indications and expectations are that rates should continue in the 3%+/- range for at least the next year.
Condos Out of Favor: The robust performance isn't true across the board. A clear Covid-induced trend is a strong drop in demand for condos. In the current environment, buyers are not drawn to high-density living situations, preferring the social separation afforded by single-family homes. While this is true across the region, San Francisco has been particularly hard hit. SF condo inventory more than doubled in the 2nd half of the year, and sales volume is down 15.7% from a year ago.
Changing Definition of Home: The pandemic has radically altered our definition of, and relationship with home. Up until this year, our homes were a place to eat, sleep, and occasionally lounge. Now our homes are our offices, schools, restaurants, fitness centers, playgrounds, and entertainment venues. Homes that were perfectly adequate suddenly no longer meet our needs, driving significant activity in the real estate markets.
Buyers today are looking for more space, larger lots, and more rooms. For years the prevailing desire was for open floor plans and great rooms where the family can gather together. Today, too much togetherness (and noise) has shifted demand toward an extra bedroom or dedicated space that can function as an office/Zoom room, or study room. Look at how homes are staged today and you will almost always see an office vignette included.
Larger lots are also sought after. With many parks, playgrounds, and other outdoor spaces inaccessible buyers are looking for more room to get outside safely to play and exercise.
A Changed Industry: For a historically stodgy industry, real estate has done a remarkable job adapting to this new environment, creating new technologies, processes, and protocols to give people effective access to markets, inventory, and information while keeping both the public and real estate professionals safe.
Many of the innovations are here to stay. For example, open houses will eventually be allowed again, but will never have the prominence they once had in the sales process. Video tours, 3D walk-throughs, and private virtual tours will continue to be the home shopper's first layers of evaluation before committing the time and energy to visit a prospective new home in person.
What to expect in 2021: In short, more of the same. Despite the strong finish to the year, there is tremendous pent up demand in the market place. Sales will continue to climb in 2021, with median prices expected to rise 4%-5%. Single-family homes will be the hot commodity, with continuing weakness in the condo market. This latter trend may be slightly ameliorated as the tide of the pandemic turns and first-time buyers reenter the market, but it will take a couple of years to turn that around.
Predictions of a mass exodus from the area leading to a falling real estate market are vastly exaggerated. While some out-migration will go on, the Bay Area will continue to be an attractive place to live and work, and we will never have enough housing stock to meet local demand. Companies will want their employees back in the office. There is likely to be more flexibility to work from home, but the workplace will not disappear.