NH’s frenetic real estate market can evoke memories of past busts, but this time seems unlikely

The hot and humming residential property market has the potential to awaken memories of the boom-and-bust cycles that triggered severe recessions in 1990 and 2008. However, most market mavens expect the current cycle of frenzied homebuying and rising house prices to end with the market cooling rather than crashing. Or as T.S. Eliot put it, “Not with a bang but a whimper.”

The past recessions sprang from very different conditions in both property and capital markets than those prevailing today. In short, those boom-and-bust cycles were marked by loose lending, frenzied buying, speculative investment, financial chicanery and aggressive development that together drove the value and supply of residential and commercial property beyond what economic fundamentals could support.

The current rise in home prices is driven by a severe imbalance between robust demand and short supply of homes coupled with historically low interest rates and imbalance not confined to New Hampshire. Nationally, between 1.1 million and 1.2 million housing units are needed annually to keep pace with demand, yet they have not topped 1 million since 2007, leaving an estimated shortfall of 3.8 million units.

In New Hampshire, single-family building permits peaked at about 500 a month in 2005, then declined steadily to below 150 in 2010 before rebounding above 200 in 2020. Multifamily permits peaked at 200 a month in 2005, fell to 50 in 2010 and returned to 200 in 2020.

Data compiled by the New Hampshire Association of Realtors indicates that, since 2017, inventory has diminished, while the pace of sales has quickened and the price of homes has risen.

Ten years ago, in the wake of the Great Recession, there were 14,500 homes on the market in New Hampshire. Despite the economic recovery, by 2018 the number of homes for sale had fallen to less than half that and slipped again to 5,663 in 2019.

These trends — short supply and strong demand — accelerated in the second quarter of 2020, following the declaration of a national emergency in March and the rebound of the stock market in April.

In 2020, single-family home sales in New Hampshire jumped from 2,741 in the first quarter to 4,055 in the second, followed by 5,976 in the third and 5,583 in the fourth, to close the year 5.6% ahead of 2019, the largest year-over-year increase since 2016.

Year over year, the median single-family home sales price rose in all four quarters of 2020, easily topping those of the year before. Prices rose month by month, dipping only in May and December, while climbing from $289,000 in January to $349,900 in December. The pace has not slackened this year. The median sales price reached $350,000 in January and jumped $18,000 in April to $382,000.

Meanwhile, inventory has continued to shrink, from 3,005 homes for sale in the first quarter to 1,383 in the fourth, a year-over-year decrease of 61%.

The media has been filled with reports of buyers making cash offers, sight unseen, and waiving contingencies in what some call an “auction market.” Sales have closed above listed prices since July. And David Cummings of the New Hampshire Association of Realtors said that inventory, usually measured by months’ supply, is now counted in weeks.

Timely federal aid

But runaway home prices alone do not carry the risk of a failed market. Instead, the risks lie in the economic conditions behind the veil of rising house prices.

State Banking Commissioner Jerry Little, as the original head of the Governor’s Office of Emergency Relief and Recovery, oversaw much of the distribution of federal funds appropriated by the CARES Act in New Hampshire, he said that the timely infusion of financial assistance — the enhanced unemployment benefits, Payroll Protection Program loans and other help for small businesses, as well as stimulus checks — stemmed the economic downturn and forestalled a deep recession.

Little was echoed by Gregg Tewksbury, president and CEO of New Hampshire Mutual Bancorp. “The unprecedented federal fiscal support pumped cash into the system,” he said. That support, he continued, enabled firms to develop sustainable business models that without it would not have made it.”

Unemployment, which peaked at 16.1% in April 2020, has fallen every month since, halving to 8.1% by July and again to 4.2% in November and reaching 2.8% in April 2021. That is only two-tenths of a percent lower than the 2.6% the state reported in February 2020, before the pandemic hit.

And despite the pandemic-induced downturn, bankruptcy filings dropped 40% between 2019 and 2020 to 1,054, the fewest in 32 years. Yearover-year filings have averaged 75 a month, compared to 459 in 2010, amid the Great Recession.

Mortgage delinquency rates closely track unemployment rates and both have declined in tandem. In May, Mortgage Bankers Association reported that delinquent mortgages, especially those 90 days past due, have fallen from 8.22% in the second quarter of 2020 to 6.38% in the first quarter of 2021 — the steepest drop in the shortest time ever. And 30- and 60-day delinquencies are at their lowest level since 1979.

“A year ago, we had about 1,000 borrowers in forbearance, and now we have a handful left,” said Tewksbury. “Past-due loans are at record lows, at 0.2% of the mortgage portfolio.”

In addition, the Mortgage Bankers Association reported that the number of homeowners both forgoing and seeking forbearance have declined for the past 11 weeks — a sign that, to some extent, pressures weighing on mortgage holders have been masked by forbearance program and foreclosure moratoriums.

Nevertheless, national property data firm ATTOM Data Solutions projects that when borrowers exhaust their forbearance, foreclosures in New Hampshire could rise again, from fewer than 400 in September 2020 to more than 1,600 in September 2021.

But household balance sheets are healthy. The St. Louis Federal Reserve Bank, which tracks household debt payments as a percentage of household income, reported that in 2020 it dropped to 8.69%, the lowest in two decades. In New Hampshire, the median debtto-income ratio — monthly debt payments divided by monthly income — was 1.75 in 2020, above the national average of 1.51.

Likewise, real estate data analytics firm Core- Logic reported that in 2020 rising prices boosted U.S. home equity by $1.5 trillion, an annual increase of 16%, or by an average of $26,300 per homeowner — the steepest increase since 2013. At the same time, the number of mortgage holders with negative equity dropped 21%, to 2.8% of mortgaged properties.

In New Hampshire home equity rose by an average of $36,000, while homeowners with negative equity slid to 2.5% of mortgaged properties. Rising home equity, together with declining delinquencies, provides a cushion to homeowners that should spare some from foreclosure when they emerge from forbearance.

‘Very well positioned’

These indicators reflect the stricter lending practices introduced by lawmakers and regulators after the financial debacle of 2008 and subsequent Great Recession.

The Dodd-Frank Wall Street Reform Act and Consumer Protection Act of 2010 stiffened regulation of financial services. The legislation restricted the issuance of NINJA loans (no income, no job, no asset), “liar loans” (which required little or no documentation) and jumbo loans, which exceeded the financing limits of the Federal Housing Finance Agency. In addition, the number of loans with risky gimmicks, like teaser rates and balloon payments, has diminished.

Tewksbury confessed to initial misgivings about tighter regulation, but lauded what he called the “the ability-to-pay provisions” requiring lenders to ensure the creditworthiness of borrowers by returning to prudent lending practices.

”It created a level playing field and protected both lenders and borrowers by introducing stricter underwriting standards,” he said.

“I have never seen banks in a stronger condition,” he added. ”We’re very well positioned to weather a storm, if it comes.”

While liquidity was a concern before the pandemic, he said much of the federal stimulus funding “flows from consumers and businesses and lands in the banks.” “We’re flush with liquidity,” Tewksbury said.

Deposits have increased significantly and the capital position is robust, he said, recalling that, “with the initial uncertainty, we increased reserves and anticipated some losses when the federal support dries up, but today I feel very differently than I did a year ago.”

Among the three major factors driving the housing market — supply, demand and mortgage rates — an increase in rates is most likely to affect the trend of brisk sales at rising prices in the near term.

As mortgage rates slid to record lows in October, they have gained momentum since. They inched up from their record low of 2.65% to around 3% in April and are expected to increase fitfully and modestly for the rest of this year.

Higher rates will cool demand, likely slowing the pace of home sales and price increases. And supply constraints will persist.

Without a steep spike in foreclosures, the inventory of existing homes will remain tight. Price appreciation may prompt some homeowners to sell, while dissuading others from becoming buyers. With 48 million millennials turning 30 this year, demand for housing is unlikely to slacken significantly for some time.

Before the pandemic, economist Russ Thibeault of Applied Economic Research estimated New Hampshire was short at least 20,000 housing units, especially affordable units, and that shortfall has only grown more severe.

The New Hampshire Legislature did take a step toward addressing the shortfall this session in passing House Bill 154, which authorizes municipalities to offer preferential property tax treatment to affordable housing development in designated areas. However, a more expansive package of measures to incentivize and facilitate housing construction introduced last year remains stalled.

Absent an unforeseen black swan event, the New Hampshire housing market seems to be in far better shape than it was after the 2008 financial crisis and in the recession of the early ‘90s, which led to the closing in one day of seven of New Hampshire’s largest banks. Those banks all failed because of a profusion of bad real estate loans.

Today, however, the concerns are different.

Until the inventory deficit is overcome, the lack of housing, both for sale and rent, at reasonable costs will continue to weigh on the capacity of the economy to grow.

Since 2017, housing inventory has diminished, while the pace of sales and price of homes have risen.