The global pandemic upset nearly every aspect of social life in 2020 and ended the longest economic expansion in U.S. records as millions were laid off or furloughed. But through a unique mix of market forces, the for-sale residential real estate market emerged as a pillar of growth and a source of optimism and opportunity for many in an otherwise bleak year.
The rental market, on the other hand, fared worse: Rent appreciation slowed, and renters were disproportionately impacted by the pandemic.
Although the market briefly hit pause in spring due to uncertainty and widespread stay-home orders, 2020 was a record-breaking year in residential real estate. Triple demand drivers of low mortgage rates, waves of first-time buyers and changing consumer preferences and remote work options coupled with supply shortages and shifting rent patterns took many housing stats to extremes. And in the face of the pandemic, we expect 5.7 million homes to trade hands by the end of the year; 5.9% more than did in 2019.
In September, one in five houses sold above list price – about 50% more than long-term norms. Houses’ typical time on market reached down to 12 days in October — selling at blazing speeds regardless of price. By November, home values had risen 1.1% since October and 3% since the previous quarter — the largest monthly and quarterly gains in Zillow records going back to 1996. Inventory declined every week starting in early June – by the week ending Dec. 12 it was 34.3% below 2019 levels.
Rents never fell across the U.S. but year over year growth fell to just 0.7% in October, the lowest annual growth seen since the Zillow Observed Rent Index began in 2015. Typical rents in November were just $4 higher than those in January.
Unlike the mortgage crisis and financial collapse in the Great Recession that sent home values plummeting, this booming market is built on responsible, stable loans and a blend of strong housing market fundamentals. In response to these forces, rising prices drove the largest gains in home equity since 2014, offering owners additional protection against future downturns.
Coronavirus disrupts spring sales season, troubles renters
Demand for houses was already high coming into 2020, driven by two major factors: a large generational move into prime home-buying age and low mortgage rates that began the year in the mid-3s and largely went down from there. Rent growth was strong as well, up roughly 4% year-over-year in January through March.
Then the pandemic hit.
As the number of coronavirus cases grew and lockdowns began taking effect across the United States, sales activity slowed dramatically. Buyers and sellers alike pulled back from the market.
After the third week of March, newly pending sales dropped each week through mid-April, hitting a low of 38.8% below 2019’s figures in a time period when sales usually heat up. Time on market grew to three days longer than last year in early May, while list price appreciation fell to just 0.1% above 2019.
Year-over-year rent growth in the U.S. saw the biggest one-month slowdown in at least five years. About 3 million adults moved in with their parents or grandparents in April, bringing the number of adults living at home to the highest number on record.
Renters themselves were disproportionately impacted by the pandemic. Those who are in jobs that faced the most layoffs and furloughs tended to be renters. They generally have higher housing cost burdens and lower incomes, as well as a larger share of household incomes coming from high contact-intensity workers.
The CARES Act passed in March included much-needed assistance for Americans reeling from the pandemic, including $1,200 stimulus checks and an additional $600 a week for those receiving unemployment benefits. Forbearance programs gave homeowners flexibility in ways to manage missed mortgage payments. And while an eviction moratorium was put in place in September, it remains to be seen how renters and landlords will react when it expires.
Bouncing back
Despite the outbreak of COVID-19 and associated waves of layoffs, the housing market absorbed the shock relatively quickly and began to recover. Pent-up demand that was put on hold was unleashed starting in late April, then supercharged by even lower mortgage rates and changes in housing needs. All this time spent at home put an emphasis on additional space — both indoors and out — while, for many, remote work unlocked new homes for consideration outside regular commute ranges or in more affordable cities.
Annual growth in median sale prices — which are reported at a lag compared to list prices and home values because of the time it takes to close on a home purchase — peaked at 7.4% the second week of April, before plummeting in the early days of the market freeze and falling to 0.8% by late May. But after the freeze began to thaw, year-over-year growth rose sharply and steadily, hitting new highs of 13.8% by late October, the most recent data available.
But while the for-sale market heated up, rent growth cooled. Annual rent appreciation slid from 3.9% annual appreciation in February down to 0.7% in October, before ticking up to 1.1% in November. The largest declines in rent were seen in expensive coastal metros such as New York and San Francisco, while the biggest gains took place across the Midwest and Sun Belt – Memphis, Phoenix and Riverside.
Technology reinstates confidence in searching and closing
Technology also played a major role in restarting the market. Beyond vast photo galleries, online viewing options such 3D home tours featured on listings and live video walk-throughs with an agent grew more popular and allowed prospective buyers to get a more immersive experience from the comfort and safety of their own homes.
Online transaction services provided a safe and secure way for houses to change hands. A Zillow survey in July found that 36% of Americans would be more likely to buy completely online and 43% would be more likely to sell completely online during the pandemic than previously.
Home supply cut short
Although buyers were eager to close on houses, sellers were not so anxious to move. Inventory was low compared to 2019 to start the year, and that gap widened nearly every week through early December. Despite the rise in home values and sale prices, sellers didn’t come off the sidelines in enough force to balance out demand, keeping the market tilted in their favor. In a Zillow survey of homeowners considering selling in the next three years, 34% cited life being uncertain and 31% said financial uncertainty kept them from listing.
And while builders rushed to provide new houses — especially in the latter half of the year — home construction still has yet to return to levels seen prior to the Great Recession. Despite high builder confidence in the fall, volatile materials prices (including sky-high lumber prices seen in August) and a lack of available land kept homebuilders from truly stepping on the gas to meet the abundant demand.
Very tight inventory, coupled with strong demand from first-time buyers and those reassessing their housing preferences in light of the pandemic meant that the market began to move incredibly fast. Homeowners who did choose to list had little trouble finding a willing buyer. After peaking in early May, time on market began to fall through early November as available homes were snatched up more quickly. Again, technology helped buyers keep pace by enabling them to find, view and close on homes they liked in a fraction of the time it took just a few years ago.
A limited pool of inventory may not have been ideal for those in search of choice or in need of more time, and new and active inventory both appear lower than what the market is demanding, but that didn’t stop a significant volume of sales from occurring. Enough inventory was available to quickly match a high number of enthusiastic buyers with willing sellers, and when it is all said and done — even through a deadly pandemic — we still expect the number of completed sales to be higher in 2020 than in 2019.
Still, that higher volume of completed sales is coming at a much faster pace. As of the week of Dec. 12, houses were typically on the market a median of just 16 days before an offer was accepted — up a handful of days from lows set in earlier weeks, but still a full three weeks (21 days) less than the same time last year.
Extremely low mortgage rates contributed to demand and relative affordability
Mortgage rates posted a banner year in 2020, contributing to intense demand for houses. On average, rates on a 30-year fixed loan with 20% down payment fell by a full percentage point from the beginning of January to the beginning of December – a remarkable feat considering how low mortgage rates were already heading into 2020. The record low mortgage rates made monthly home payments more affordable than in 2019, although rising prices made it more difficult for first-time buyers to save up for a down payment. Many who already owned homes used low rates to refinance, saving a bundle on monthly payments or pulling out cash that could be used to finance home renovations or help alleviate the stresses of job loss.
Applications for home purchase loans are up 26% for the week ending Dec. 11 compared to last year, according to the Mortgage Bankers Association, and Zillow’s measure of newly pending home sales is up 18.2% year-over-year for the week of Dec. 12.
The unprecedented health crisis of the pandemic affected everyone and took a toll on society that will not be fully realized for years. But for millions of U.S. home buyers, 2020 provided an opportunity to move into the next phase of their lives.
