It is no secret the real estate industry experienced record-breaking highs during the COVID-19 pandemic. That, combined with the sharp drop in home sales this past year, prompted Fannie Mae to look into what actually drove purchase demand in 2020 and 2021 and what has changed.
“Anecdotal and analytical evidence suggest that the pandemic prompted people to move from smaller housing units in high-density city centers to larger homes in lower-density areas; and this was particularly true of first-time homebuyers,” the report stated. “Overall, the rise in home sales was fueled by both first-time homebuyers and move-up buyers. In fact, demand was so strong that the median number of days that homes were on the market shortened from 74 in 2017 to 46 in 2021.”
However, the survey conducted by Fannie Mae’s researchers discovered financial considerations had more of an influence on consumer’s decision to buy than physical space or location.
One study conducted in the first quarter of 2021 asked respondents whether they accelerated their home purchase because of the pandemic or because of the low interest rates. Slightly over half of respondents (56 percent) said the pandemic neither accelerated nor slowed their home purchase timeline. First-time homebuyers were more likely to say it accelerated their home purchase decision than repeat or “move-up” buyers (29 percent compared with 13 percent, respectively).
When asked whether the low interest rates impacted their home purchase timeline, 48 percent of homebuyers said they accelerated their home purchase because of the low rates, compared with 21 percent saying they did so because of the pandemic. First-time homebuyers were particularly influenced by the rate drop, as 53 percent said they sped up their purchase because of interest rates.
Another study, conducted in the fourth quarter of 2021, offered respondents a list of possible homebuying reasons and asked them to rank their three most important reasons.
“The key motivator for consumers to purchase a home during the pandemic was to meet a financial objective, such as believing that it makes more financial sense to own than to rent or taking advantage of low interest rates,” the research paper stated. “The latter was particularly true for HomeReady Borrowers, many of whom have 3 percent down payment mortgages.”
That it makes more financial sense to buy rather than rent was cited most frequently across sample groups as the most important reason for purchasing a home, followed by the desire for more space, mostly likely driven by pandemic social behavior and preference shifts.
The survey also contradicted previous suggestions that people moved from high-density city centers to lower-density areas because of the pandemic, or that the flexibility of remote work allowed people to relocated to preferred locations. Responses showed location-related motivations were weaker than the financial- and space- related motivations.
“As the path of home sales over the past two years shows, consumers’ ability to act on favorable attitudes about homeownership depends largely on having the necessary financial resources; and low interest rates and a strong economy during the pandemic recovery period provided a favorable environment for home purchase activity,” the paper concluded.
“We currently forecast that existing home sales will remain at a relatively low level until some combination of lower home prices or lower interest rates helps reverse the deterioration in affordability that, as of this writing, has made homeownership more unaffordable than at any point in the past 20 years.”