The US stock market has had a phenomenal performance in 2020, despite the pandemic. There are several reasons for this massive upside in the equity market which seems to be overlooking the economic risk and rising COVID-19 cases in the nation. These trends will help determine whether the US housing market will have a similar boom in 2021. The US stock market as measured by the S&P500 has risen by 13.8% for 2020, with November being one of the best months in the history of the market! The S&P500 rose 10.8% and the tech-heavy Nasdaq composite was up by 10.8%. So, the question arises when unemployment is high and businesses are on the verge of bankruptcy, what is fuelling the market?
End of COVID-19
The pandemic is predicted to slow down in 2021 as vaccine approval news has hit the streets. Companies like Moderna, Pfizer & BioNtech are racing to release their vaccine. This is good news for the market as it reduces uncertainty and risk in the future. Lockdowns were the main reason for the rise in unemployment and business closures, however, with a vaccine on the horizon the rising cases do not seem to deter investors. Investors are actually increasing their investments in cyclical stocks such as leisure, travel, and hospitality that took the biggest hit during the pandemic.
The government is in another round of talks to pass the stimulus package before the end of the year. The initial stimulus played a big role in pumping the market. The stimulus provided businesses and their employees some respite during the lockdowns as bills could still get paid. Coupled with cash injections from the Fed, the stock market has received a large intake of this economic stimulus.
Now the question arises, will the US Housing Market follow in the footsteps of the stock market. There are several trends to follow to determine if 2021 will result in a booming housing market:
1. Rock-bottom Mortgage Rates
COVID-19 resulted in the decrease in the cost of borrowing which was initiated when the Fed slashed the Fed funds rate to 0-0.25% during two emergency rate cuts in April. The prime rate soon followed and was reduced to 3.25%. This resulted in lower mortgage rates which are currently around 2.25% for a 30-year fixed mortgage. Mortgage rates have not been this low since the housing market crash of 2008 and are expected to decline further in 2021. Adjustable-rate mortgages and Home Equity Line of Credit (HELOC’s) rate will also benefit from a lower prime rate as these loans are financed using a benchmark index rate and an additional spread. Therefore, the monthly amortization amount will be lower as a result of a lower prime rate. This is good news for the housing market as buyer demand is likely to rise which will help propel the market.
2. Vaccine Release
Just as the stock market is rising high on the vaccine news, it is likely that the housing market can also appreciate. The lockdowns resulted in fewer viewings and overall lower sales; however, as the vaccine is released, uncertainty and risk will be removed from the home selling and buying process.
3. Housing Prices
Home prices have been rising steadily since the summer as the market returns to be a seller’s market. For a brief period following the lockdown, there was a buyer’s market; however, with lockdowns being lifted the seller’s market has returned. As a result of which, home prices are rising and are estimated to be 7.9% higher in October of 2021! These rising prices will deter certain investors & buyers and might result in the slowing down of the market. Hence, it is yet to be seen if the rising prices are seen as an advantage to invest or as a deterrent to buy.
4. Lending Requirements
As a result of the pandemic, millions of jobs were lost, and several businesses went bankrupt. Certain industries were crippled as a result of the lockdowns. All these factors made it harder for homeowners to make their monthly mortgage payments and increased the risk of default. In response to the additional risk in the market environment, most lenders have stricter mortgage requirements such as a higher credit score and a lower loan-to-value (LTV) ratio. The credit score will be required to be at least 720 for most lenders as compared to the earlier 620. A down payment will be required to reduce the loan-to-value ratio which is a financial metric used by lenders to determine the amount of risk being undertaken.
The stock market has had a bull run and an exceptional performance in 2020 despite the pandemic. The main reasons can be surmised as the stimulus and influx of government money, along with the possibility of a vaccine. The housing market also had an interesting year with the pandemic changing the manner in which business was conducted. Trends that started in 2020 will carry on in 2021 include the low mortgage rate environment, rising home prices, and vaccine use. The negative effect is the stricter lending requirements in place that will deter buyers and reduce mortgage lending. The stock market often includes the business and consumer sentiment which can be a helpful indicator of the future of the housing market. As consumer sentiment improves and the stock market rises, this can be an indicator that the housing market is also expected to rise. Although there is no direct correlation, the market and consumer sentiment which is driving the stock market is definitely positive. Therefore, even if the market indicators predict a rise in the housing market it is yet to be seen if the housing market will have similar growth in 2021!