First American: Home price growth to accelerate with pent-up demand, growing tenures

Despite a recent CoreLogic projection calling for home prices to fall year over year by next April, First American Financial Corp. is anticipating appreciation to accelerate in the near term.

The reason, said First American deputy chief economist Odeta Kushi, is simple: The pandemic has further deepened the already severe housing supply shortage.

Kushi noted that coronavirus-related pressures drove pushed inventory to its lowest April level ever last month. Concerns about infection risks and uncertainty over the economy have made homeowners think twice about listing their residences for sale, potentially lengthening already increasing home tenures even further.

Growing home tenures — the length of time that homeowners occupy their homes — has already become a major factor in dwindling supply, Kushi noted. Right after the Great Recession, tenure stood at about seven years; currently, it’s over 12 years, the highest it’s ever been.

That, in turn, has limited the flow of existing homes into for-sale supply. Inventory turnover, defined as the total supply of homes for sale as a percentage of occupied residential inventory, sank to 1.52% in December. That means that just 152 out of every 10,000 homes were for sale, the lowest level in 25 years and well below the historical average of approximately 250.

There was some slight improvement over the first quarter of the year before the COVID-19 pandemic pushed the turnover figure back down to 1.58%.

The market had seen some modest tenure length easing pre-pandemic, Kushi reported, with the rate of tenure length growth decelerating to 7.6% year-over-year in February. The coronavirus crisis, however, has since sped the annual tenure length growth rate back to 8.5% in both March and April. Tenure length appreciation has grown faster since the pandemic began in 45 of the 50 large markets tracked by First American, and all 50 cities saw higher average tenure length in April than the same month one year ago.

Meanwhile, pent-up demand appears ready to flood into the market. Redfin reported last month that homebuying demand now sits 16.5% above pre-coronavirus levels on a seasonally adjusted basis as mortgage rates have kept a keen-eyed public ready to explore their purchase options. And in a further sign of buyer enthusiasm, the National Association of Realtors said this week that 65% of people who attended an open house within the last year would do so now “without hesitation.”

Should they begin to do so, they’ll re-emerge to find even less options than they had before the pandemic started, making for more a competitive market, Kushi said.

Put simply, per Kushi, you can’t buy what’s not for sale.

“As pent-up demand from the pandemic-delayed spring home-buying season enters the market, potential home buyers have very limited inventory to choose from,” she said. “Lack of supply relative to demand is a surefire recipe for increasing house price appreciation.”

It’s worth noting that CoreLogic is also projecting month-over-month home price appreciation (though muted from past months) between April and May. CoreLogic chief economist Frank Nothaft, in fact, noted that “the very low inventory of homes for sale … will likely continue to support home price growth during the spring.”

But with COVID-driven joblessness continuing to pose a significant headwind to the economy’s growth moving into next year, that home price growth is likely to see its end by 2021’s second quarter.

 “If unemployment remains elevated in early 2021, then we can expect home prices to soften,” Nothaft said.


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