Consumers likely to use pandemic-driven increased savings on housing

The explosive growth in consumer savings during the pandemic is likely to drive home purchases this year, especially by millennials, housing data provider Zonda predicts.

Over the past 12 months, personal savings have reached historic levels, said Ali Wolf, chief economist for Zonda during the Urban Land Institute's Housing Opportunity Conference.

The U.S. savings rate has gone from 2.5% before the financial crisis to 8% prior to the start of the pandemic; it is now at 35%.

About 60% of millennials surveyed by Zonda said they saved more money in 2020 than they did in 2019. When asked what their plans were for the savings, the No. 1 response was to save more money; but their second choice was to use it for a down payment to purchase a home.

"Historically, in every year in this survey, the millennials say the reason they haven't purchased a home right now is because of affordability and they haven't come up with a down payment," Wolf said. "[Now] you have a year of forced savings, you have three different stimulus checks and you have student loan forbearance that's going to be extended through September."

But perceptions of what rising interest rates and home prices mean for affordability may make some of those would-be buyers balk at conditions in the market today. There is an awareness among them that prices are quite high today, Wolf said.

"But we are in a monthly payment business, so education is helpful on this front," Wolf said, pointing out that even with rates rising, compared with a year ago, borrowers can save between $75 and $200 a month in mortgage payments depending on the market.

Zonda forecasts that the 30-year FRM will remain at an average of 3.2% for the rest of this year. The Federal Reserve Board is not expected to raise rates until 2023, although more clarity is likely following the end of its meetings Wednesday.

But before then, if investors push 10-year Treasury yields — and thus mortgage rates — up too high, the Fed can bring back "Operation Twist," in which it purchased mortgage backed securities in order to keep rates low, Wolf said.

Some risks to the forecast include a troubled commercial real estate market, the end of forbearances and a shortage of — and the costs of — lots for new construction.

Still, the positives for housing, besides the demographics, are the growth in the stock market and consumer savings, plus the stimulus package, along with a rising tide that is bringing up some on the lower end of the spectrum that had here-to-for been left behind in the recovery.