U.S. home prices hit a record high in 2020. Is home buying still affordable?

October 13, 2020 - 6 min read

U.S. home prices hit a record high in 2020

The median home price in the U.S. hit its highest point ever in 2020 — just above $320,000.

But don’t let higher prices scare you off from the housing market.

While home values have generally been rising, mortgage rates have been falling.

The result is that home affordability may be a lot better than most people believe.

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Don’t be too worried about rising home prices

The idea that home prices are soaring is hard to ignore.

Just look at these recent headlines.

  • “U.S. Home Prices Up 15%, Largest Growth Since at Least 2005” Redfin
  • “July home sales spike a record 24.7% as prices set a new high” CNBC
  • “Lot Values Hit Record Highs” National Association of Home Builders

If you’re a property owner, these headlines are a wonder to behold.

But what if you’re a buyer? Should the “highest ever” headlines scare you off?

The short answer is no.

Through these turbulent times, the real estate market has been a high point for the U.S. economy. Even as home values continue to rise, low mortgage rates lend shoppers more buying power.

In this way, buying a house has remained largely affordable even throughout the worst moments of the pandemic.

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How coronavirus has affected the real estate market

It’s perfectly natural to assume that property prices would tumble this year as a result of the pandemic.

With millions of people newly unemployed and businesses across the country closing, it makes sense to think that demand would slacken and prices fall.

And yet, in most markets, this has not been the case.

Redfin, a national real estate brokerage, reports that a number of measures for the four-week period ending October 4th are strong.

Home values and sales prices are up

“The median home sale price increased 15% year over year to $320,625 — the highest on record,” says Redfin.

This number marks a period of record growth in U.S. home prices.

Up until now, “The largest increase ever recorded in the Case-Shiller national home price index (which goes back through 1988) was 14.5% in September 2005,” says Redfin.

But, “In the week ending October 4, home prices were up 16% from the same week a year earlier.”

Housing inventory remains low

The report also adds that “active listings (the number of homes listed for sale at any point during the period) fell 28% from 2019 to a new all-time low.”

“The rate of year-over-year supply declines has remained consistent at this level for the past few months.”

This indicates that buyers are snapping up homes quickly — and the demand for inventory hasn’t slowed despite a weakening economy caused by the pandemic.

For some, it’s become easier to buy a house during COVID

The economic impacts of COVID have been unevenly spread.

For those who lost work or hours during the pandemic, buying a house has become more challenging.

But in an odd twist, home buying has become easier for some.

In one part of the economy, people can work from home, savings are going up, and debts are going down. Many of these folks are seeing higher credit scores.

According to Ellie Mae, in August the typical mortgage borrower had a 752 FICO score. That’s up from 728 in April 2019.

Higher credit makes it easier to qualify for a mortgage and a low rate.

In addition, it’s now possible to look at homes online, take video tours, and close a mortgage remotely from the comfort of your home. This can make the process more convenient for those who are still in a position to buy.

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Why are home prices rising so steeply?

To sum it up, home prices have risen so quickly in 2020 due to spiking demand and low inventory.

In a year when “shelter in place” has become the new mantra, many people have begun to reconsider where they live.

There’s a large wave of home buyers exiting the city and buying in the suburbs for more space and lower living costs.

Not only that, but people with well-established households are also looking to move as adult children move back home.

In fact, the Pew Research Center says that 52% of young people — those aged 18 through 29 — now live with a parent or parents.

“Large, expensive, luxury homes are taking up a bigger share of the homes that are selling, which is driving a high growth rate for the median sale price,” said Redfin chief economist Daryl Fairweather.

In addition, “Remote work is increasing demand from affluent people, while middle-income people are more often expected to do their jobs in-person, and many have been affected by furloughs and shutdowns.”

Are home prices going to drop?

Home prices are not likely to start falling in 2020, largely because inventory remains low.

At the same time that homes are in demand, owners have become less interested in selling.

For August, according to the National Association of Realtors, 1.49 million units were available for sale — down 18.6% from a year earlier.

That’s a huge drop in available real estate at the very time many people want to buy.

“Strong price growth seems poised to continue... as buyers battle to outdo each other, bidding on a record-small pool of homes for sale.” Jeff Tucker, Senior economist, Zillow

“The consequences of months of tightening inventory are being felt keenly by the nation’s housing market in the form of jaw-dropping price appreciation this fall,” said Zillow senior economist Jeff Tucker.

“Our data on closed sales show sellers within a hair’s breadth of double digit year-over-year appreciation, an outcome almost unthinkable after prices stalled out in the depths of nationwide lockdowns this spring.”

Tucker continues, “Strong price growth seems poised to continue into the near future as buyers battle to outdo each other, bidding on a record-small pool of homes for sale.”

Mortgage rates are saving the market

Plummeting mortgage rates are the special sauce for home buyers, keeping them in the market even as sales prices continue to rise.

This is possible because low rates offset higher prices.

For example, imagine a $200,000 mortgage at 4.54%. (That was the average 30-year rate for 2018, according to Freddie Mac.)

  • A $200,000 mortgage at 4.54% will have a monthly cost for principal and interest of $1,020
  • At 2.87%, (the new record low in October), that same payment will cover the monthly cost for a $245,500 mortgage
  • That's a $45,000 increase in buying power — simply due to lower mortgage rates

The catch, of course, is that lower rates work well for those who still have jobs and income. But they’re less helpful to borrowers who were laid off or experienced financial setbacks during COVID-19.

If you find yourself in the second camp, take heart.

Mortgage rates are predicted to stay low well into 2021 — and maybe longer.

So even if your circumstances prevent you from buying a house right now, you may have a good chance at similarly low rates a year or two from now.

And if you are in a position to buy right now, today’s rates mean that home buying is likely still in reach despite higher home prices and tougher competition.

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Peter Miller
Authored By: Peter Miller
The Mortgage Reports contributor
Peter G. Miller, author of The Common Sense Mortgage, is a real estate writer syndicated in more than ​50​ newspapers nationwide. Peter has been featured on Oprah, the Today Show, Money Magazine, CNN and more.