The COVID-19 pandemic caused a recession, but not for the housing market. In fact, record-low mortgage rates and surging home prices have already turbocharged the post-pandemic economic recovery.
Writes Brian Chappatta in a Bloomberg Opinion piece, “We’ve reached the point at which superlatives don’t do justice to what happened in the U.S. housing market over the past year.”
What happened was that mortgage originations reached nearly $1.2 trillion in the last three months of 2020, a record quarterly volume. Americans already quarantined at home refinanced more mortgage debt in 2020 than any year since 2003. Mortgages taken out to buy a home on the super-heated housing market also reached their highest numbers since 2006.
Added to that mix were a record number of first-time buyers who took on more debt than at any time in history. Likewise, mortgages for repeat buyers and investors looking for second home or investment property surged to the highest point in more than ten years.
The spill-over was a breathtaking surge in existing home prices across the country. That bump led to an additional surge in homeowners who dipped into their growing equity and withdrew an aggregate of $182, or an average of about $27,000 for each household. Even those who left that extra cash in their home’s value saved an average of $200 a month on lower mortgage payments after refinancing.
All that home equity cash needed an outlet. The Stock Market and other financial sources were undoubtedly beneficiaries of this extra cash. When we wrote about the apparent disconnect between stock market performance and the pandemic recession, the market had already bounced back to 28,000 territory. Since then, the number has continued to climb towards the 33,000 high.
Other factors have contributed to the COVID-19 housing boom:
- Housing construction came to a halt during nation-wide forced construction closures worsened the shortage and raised prices for existing homes.
- Wage earners whose mortgage payments went down had extra money to ease the burden of caring for children or to easily transition to a work-from-home arrangement.
- Vacation travel came to a sudden halt, and the money saved was spent on goods online and elsewhere. (There was a giant rebound in retain sales in May and June 2020, right when the 30-year mortgage rates began setting new lows.)
- Existing home equity caused a wealth effect as the average home equity increased by 10.8%, with an astonishing collective gain of $1 trillion.
There are indications that the housing boom will not burst like the 2008 bubble. Back in 2003, just 31% of new mortgages went to borrowers with top credit scores. In the last quarter of 2020, 70% of the funds were targeted to borrowers in the top tier, who had credit scores higher than 760.
The not-so-good news is that all that demand with scant new construction could lock out new buyers. The better news is that the surge in home values and availability of mortgage money has caused a tectonic shift beneath the U.S. economy. It could be the foundation for a post-pandemic recovery unlike anything in recent memory.