Lawrence Yun, the chief economist of the National Association of Realtors.

Interview with Lawrence Yun, the chief economist of the National Association of Realtors.

During the pandemic, a great deal of folks welcomed their adult children back home. Some were college students taking classes online, instead of on campus. Others were post-grads who lost a job in hospitality or travel. Many were underemployed to begin with, trying to make a living off of gigs, like driving for Lyft.

However, even before the pandemic, the trend toward intergenerational housing was already underway. Intergenerational housing is higher today than it was during the Great Depression (source: Pew Research)!

18% of Gen Z home buyers are purchasing larger homes to house their parents and future children (source: The National Association of Realtors). This may be partially motivated by the need to borrow money for the down payment, in addition to budgetary and pandemic concerns. How will homesharing affect home buying and the real estate market going forward?

  • Is multigenerational housing and home buying a lasting trend or a fading fad?
  • Are the nuclear family and smaller homes a thing of the past?
  • Can multigenerational housing fix an overleveraged personal budget?

On  March 25, 2021, I spoke with Lawrence Yun, the chief economist of the National Association of Realtors, about these trends and more, including:

  • Where are real estate prices headed in 2021?
  • Is the real estate market too hot?
  • Should you buy or wait?
  • Should you sell, remodel or add-on?
  • Which cities and home types are the hottest?

Natalie Pace: 18% of Gen Z are purchasing multigenerational homes, with a 12% increase overall. How is this affecting the real estate market?

Lawrence Yun: The silver lining of the pandemic is that people want to have a larger size home, perhaps to turn one additional bedroom into an office space. As they were considering this, they said, “Well, why don’t we get an even larger home that could accommodate our elderly parents?” There is also the financing aspect, where the parents could help out. It’s a very interesting development. We don’t know yet whether this is a permanent trend, or just a temporary, cyclical situation. I have heard from people that they want their parents to be living in a single-family home, rather than a nursing home, in case of a future virus breakout.

NP: Home prices are high. When more people are contributing to the budget, it’s easier to afford the mortgage. How does this affect other housing types? Does this shift in demand toward larger homes negatively impact the sales of 2-bedroom homes?

LY: Right now, the demand is strong across all price points. We have seen a doubling in home sales for million-dollar plus homes. At the under $250,000 price point, sales are negative from last year. Is there a change in preference? [No.] There’s simply not enough inventory at the low end.

NP: In the wake of the pandemic, we saw weakness in very expensive markets, like San Francisco and Manhattan. Is there still a trend out of the city and toward the suburbs?

LY: The overall long-term trend is toward smaller towns in less expensive parts of the country. The work-from-home flexibility for office workers is a new phenomenon. People will be wondering why they are paying such high housing costs in San Francisco, when they could be elsewhere, even Sacramento, which is not too far from San Francisco. We have seen Sacramento take off in terms of sales and prices.

NP: Last year was one of the most challenging economies in history. Yet real estate prices went crazy.

LY: Home sales increased 7% nationwide on a year-over-year basis [in 2020]. The prices are still running very strong.

NP: Is it too hot? Will 2021 cool down? Or will the fundamentals – Millennial interest and lack of availability – push prices higher in 2021?

LY: We have a record low of listings. The latest data is showing a 15% price appreciation from one year ago. The cause is very simple. We don’t have enough supply. If we can bring supply to the market, it will tame some of the price growth that we have been experiencing.

NP: Do escalating prices and lack of inventory have anything to do with the moratoria on rental evictions and foreclosure forbearance?

LY: Yes. There are roughly 2.6 million homeowners in the mortgage forbearance program. We are missing roughly 260,000 homes that could be on the market. As the mortgage forbearance period winds down, we could see more inventory.

Also, many of the elderly population who wanted to move to a retirement home, or to Florida, do not want strangers visiting their home. Now, with the vaccine making progress, some of the elderly households will also list their homes.

NP: Could increasing mortgage rates impede future sales? What could push mortgage rates up, when the Fed Fund rate is predicted to stay very low for the next few years?

LY: Mortgage rates are influenced by many factors, including inflationary expectations, how the 10-year bond yields are moving and the Treasury government bond borrowing rate. Mortgage rates have already jumped up in recent months. The absolute low was back in December/January, when it was averaging 2.7%. Now it is above 3%. It’s inching higher because stimulus is not free money. People are getting the $1400 stimulus check. There is possibly more spending for infrastructure later in the year. The larger budget deficit and higher national debt make bond investors nervous. So, mortgage rates are rising. Fortunately, the increases have been in the decimal points. But if the bond investors lose confidence, and mortgage rates rise to 4% before the year finishes, that will choke off demand for homebuying.

NP: With about 1/3 of homebuyers being first-time home buyers, let’s give them some tips for successful home ownership.

LY: Be very comfortable in what you are willing to spend. Don’t overstretch. There are multiple offers and sometimes the bid offers include an escalation clause. But if it overstretches your budget, just hold off and look for a better time later, or a different neighborhood that is further out from the city, where things are more affordable.

See what the company policy will be regarding Work-From-Home after the pandemic. If there is greater flexibility, or maybe you can negotiate how many days you have to come into the office, then you have better options – more affordable options – to consider.

Many of the younger generation are saddled with student debt. There is a psychological barrier of not wanting to carry too large of debt simultaneously in student debt and mortgage debt. There is also a financial barrier. If you have too much student loan debt it is harder to qualify for a mortgage. So, try to pay down existing debt, including student loan debt, as quickly as possible, so that you can be better prepared once you want to enter the market.

NP: What’s your advice for Main Street real estate buyers and sellers in 2021?

LY: For the buyers, understand that it is a very competitive market out there. For the sellers, they have been in the driver’s seat in terms of what offers to accept. Don’t price your home too high, thinking that the market is hot. Once your home stays on the market too long, it gets a label that it is stale or that there is something wrong. Also understand that the market that has been hot will not be hot for very long. If you want to consider selling, now may be a good time because it should be easy to find buyers.

NP: I always say, “Align your mortgage pay-off date with your retirement date.” Is that counsel you would give as well?

LY: That is very good advice. Once you retire, your retirement income is to enjoy life, after multiple years of dedicating your life to work.

With real estate prices hitting all-time highs, and many cities unaffordable, Americans are finding innovative solutions, including multigenerational housing and moving out of expensive cities, particularly when they can work remotely from home. If you are saddled with a lot of student loan debt, the cost savings of multigenerational housing might make it easier to pay down debt, build up your down payment and get into your own home much more quickly than if you are attempting these things from a high-cost apartment. If Lawrence Yun is right in forecasting that a hot real estate market might cool down later this year, then waiting for a better opportunity could be the best way to ensure that you don’t have buyer’s remorse down the road.

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