Nobody could expect the coronavirus pandemic moving into 2020, and making predictions about what the housing market will bring in 2021 feels equally nebulous. Much is going to depend on the coronavirus vaccine distribution, and the economy is still, frankly, up in the air. Making 2021 housing market predictions isn’t easy in this environment, but we’ll do our best anyway.
We sat down with seven real estate economists and experts to talk about what they think is likely to happen in 2021. What should buyers and sellers be thinking about as the year begins? What opportunities exist for real estate agents? What’s likely to happen to mortgage rates? Home values? And more?
Our sources include Leslie Appleton-Young, the chief economist at the California Association of Realtors®; Nadia Evangelou, a research economist for the National Association of Realtors®; Dr. James Gaines, chief economist of the Real Estate Center at Texas A&M University; Frank Nothaft, executive and chief economist at CoreLogic; Todd Teta, chief product and technology officer at ATTOM; Toni Vanderheyden, a real estate agent with 17 years of experience in Rockford, Illinois; and Dr. Alex Villacorta, cofounder and chief data officer at ResiShares.
Here are our experts’ predictions.
What concerns you moving into 2021 and why?
The problem with making any predictions about this year is that there are almost no precedents or models that can help experts determine what’s likely to happen.
“The economists are flying blind,” noted Dr. Gaines. “Nobody has dealt with anything this broad and inclusive, and the response to the coronavirus wasn’t universal. Some states were much more restrained, and some were much more aggressive.”
In addition, Gaines said, “everything really hinges on getting the virus under control. The real estate market isn’t going to get back to what we think of as ‘normal’ until or unless we have at least the feeling, the psychology, the belief that we have the virus under control — and I don’t know what ‘under control’ means.”
What do you think is likely to happen to home prices?
Experts had different opinions about where home prices would go in 2021.
Most agreed that home prices were likely to stay stable or increase, largely due to the backlog of buyer demand that still hasn’t gone anywhere.
“In general, the upward momentum that we’ve seen in the second half of 2020 will likely continue in the first part of 2021,” said Dr. Villacorta, noting that interest rates are “all but assured” to stay low as vaccine distribution accelerates. “The main driver for this will be the continued outsized competition for the ‘middle of the bell curve’ housing stock that is attractive to all kinds of market segments,” including regular buyers as well as investors.
Appleton-Young said that she expects California home price growth in particular to remain robust, “though the pace of that growth will likely be lower than in 2020.” She expects median price growth of somewhere between 4% and 6% in 2021.
Nothaft opined that the shortage of homes for sale and record-low mortgage rates would drive price growth at the beginning of 2021, but added that “we do expect a moderation of home-price growth over the course of the year.”
He attributed that moderation to the advancement of coronavirus vaccinations as well as warmer weather, which he expects to bring more housing inventory to the market. “Many older homeowners who had planned to sell in 2020 decided to postpone their listing until the pandemic risk has dissipated,” he explained.
“If that happens by mid-year, then the increase in for-sale listings in the second half of the year, coupled with new single-family construction, will ease price growth.”
According to Dr. Gaines, the economy is going to recover unevenly “by geography, by type, by one side of town versus the other side of town, and especially by industry group.”
That will have ripple effects in employment and foreclosures, which will in turn affect how quickly (or slowly) home prices grow in different areas.
Dr. Villacorta agreed with this assessment. “I believe that the ‘great rebalancing’ from gateway cities to the rest of the U.S. that has been occurring over the last five years will accelerate, thanks to remote work practices from the pandemic,” he said.
“Meanwhile, the gateway cities will have a sharp, quick rebound once the pandemic ends, but their growth after that will be muted relative to the new winners for the foreseeable future, now that the work-from-home pressure valve has been opened.”
One voice of dissent came from Teta, who believes that the uncertainty around the housing market indicates that home prices are more likely to drop. “However, the crystal ball that answers this question is way cloudier than usual, with multiple factors that could cut multiple ways over the coming months.”
Teta said that mortgage rates would be one positive influence on home values: “Mortgages are cheaper than they’ve been in decades, which makes buying more attractive. That means more demand, which leads to higher prices.” However, high unemployment, a dearth of federal aid for both employers and households, and the rampant spread of the coronavirus are all factors that could dampen price growth.
“The bottom line is that there are so many unknowns — more negative than positive — that the outlook is not great, and is thoroughly uncertain.”
What do you think is likely to happen to mortgage rates?
Due to the state of the economy and the Federal Reserve’s stated plans around interest rates in 2021, there was broad agreement that mortgage rates are all but guaranteed to stay low throughout 2021.
Appleton-Young said that rates would average 3.1% or less in 2021, adding that “the Federal Reserve has already precommitted to maintaining an accommodative stance beyond their typical guidance, and 10-year Treasury rates are expected to remain fairly low due to global economic uncertainty and minimal domestic inflation.”
Nothaft said that rates are likely to remain below 3% for most or all of 2021.
Evangelou agreed that rates are likely to remain low, but she thinks rates will increase in the first quarter of 2021 to 2.9% or 3.0% from historic lows of 2.65% in the first weeks of January. The bump will be a result of market confidence driven by distribution of the coronavirus vaccine.
What do you think is likely to happen to vacancy rates?
This was another area of uncertainty for economists and experts.
Teta noted that vacancy rates will be keyed to the coronavirus pandemic recovery in addition to the moratorium on foreclosures, which has been extended through February 28. “If that moratorium stays in place, home vacancy rates should remain minuscule,” he said. “If it’s lifted, expect those numbers to rise — and potentially spike — depending on how fast lenders go after homeowners behind on their mortgage payments.”
Dr. Villacorta agreed that vacancy and homeowner rates both are likely to stay low. “Just like much of the rest of the economy, most homeowners and renters will prefer to ‘wait and see,’ and forego any major changes until more clear signals on the health of the economy become visible.”
In terms of renting households, Nothaft explained that “there has been a noticeable shift from high-rise apartment buildings to low-density structures,” which means that some renters are opting to move from apartment buildings to single-family homes or duplexes with separate household entrances. As a result, he thinks it’s possible that we will see vacancy rates in apartment buildings rise.
Evangelou agreed that rental vacancy rates were likely to increase — but not everywhere. “Parsing out area by area, during the pandemic, we see principal cities experiencing higher gains in rental vacancy rates, confirming the trend that people move and buy homes in the suburbs. In contrast, rental vacancy rates outside the metropolitan areas continue to fall during the pandemic.”
What are your predictions around home inventory?
You can’t have a conversation about the real estate economy without talking about potentially the biggest problem that it’s faced (and continues to face) in recent years — a lack of inventory. In other words, there aren’t enough homes for sale to satisfy the demand of people who want to buy a house, which is why home prices have continued to do nothing but rise in most parts of the country.
Many experts expect that inventory will rise at some point in 2021, but exactly when is up in the air. Homeowners who intended to sell in 2020 but were dissuaded by the coronavirus outbreak will list their homes when the vaccine begins to get widely distributed to the population, and more than one economist said that this is likely to bring sellers back to the market.
“It’s possible that the traditional spring buying season may see the first wave of the held-back inventory of 2020,” noted Dr. Villacorta. “More realistically, however, most homeowners will delay a major transition until later in the year — say, Q3 — as the pandemic hopefully draws to a foreseeable close and people start looking to lock in unrealized gains by upsizing, downsizing, or moving.”
Evangelou said that new home construction is also on the rise. “The combination of strong demand, low inventory, and a record level of homebuilder confidence is expected to continue to boost new home construction in the months ahead.”
In California in particular, there are dueling variables to consider. As noted, the coronavirus vaccine could inspire many more homeowners who have been reluctant to sell to finally list their homes. And a recent property tax change in California “removed a critical disincentive to move, which should also help generate new inventory from seniors aged 55-plus,” said Appleton-Young.
Unfortunately, she adds, new home construction is “dramatically undersupplied” in the state, creating a strong tailwind for building the available supply of housing.
According to Evangelou, this scenario isn’t limited to California. “We have been under-producing for the past decade,” she noted. “In the meantime, housing demand is very strong. Thus, expect the housing shortage to remain as one of the main challenges of the housing market, at least for the next couple of years.”
And of course, the foreclosure moratorium will have a ripple effect on inventory, too, as Teta points out. “The supply could grow if the moratorium expires and lenders begin foreclosing on delinquent homeowners and putting newly vacant properties up for sale.”
What are you anticipating in 2021 around …
Where buyers will be looking for homes?
Experts say that existing shifts from urban to more suburban and even rural markets are likely to continue — if employer attitudes toward remote work remain the same. “There should be a non-trivial proportion of the workforce moving toward more suburban environments,” said Dr. Villacorta.
He added that if an end to the pandemic is in sight in 2021, then we can likely see the following pre-pandemic trends to accelerate:
- “Affordable, interesting, and educated non-gateway cities will thrive.”
- “Suburbs with transit to gateways will thrive.”
- “Gateway city downtowns may slow down, but won’t likely collapse.”
- “Small towns without transit to a point of interest with critical mass will continue to struggle.”
“People are moving out of cities,” Vanderhayden opined. “People who live in cities are frustrated with everything being closed off and closed down, and they don’t have to pay the high rent if they can work virtually.”
Appleton-Young noted that in California, while “markets like Big Bear, Lake Tahoe, Palm Springs, and others have seen sales rise by 50%, 60%, or even 100%+ from 2019 levels,” but that urban metro areas were growing, too.
“We also see solid growth in home sales in our urban cores with cities like San Diego, Los Angeles, Bakersfield, San Jose, and others,” she explained, noting that “projections for urban exodus may have been premature.”
What features buyers will prioritize in the homes they seek?
We learned in 2020 that home configuration could be more important than we ever imagined, and Teta noted that “unique times” have “changed many people’s hopes and concerns. In turn, that affects their view about living spaces, at least in the near future.”
Appleton-Young says that those changes are reflected in the features that buyers in California are prioritizing. “Larger homes, offices, and outdoor space are likely to grow in importance in the wake of this crisis,” she said, “but it will also take developers time to assess these new trends in consumer preference, and then more still before they can bring those products to market for the masses.”
As millennials grow up, build their families, and buy houses, Dr. Villacorta thinks that “backyards, good schools, low crime, and access to walkable downtowns and transit are the winners.”
One trend that Vanderhayden saw emerging in 2020 — which she expects to continue into 2021 — is buyers scaling down, trading in larger homes for smaller ones.
Turnkey homes are another big draw for buyers. “Nobody wants to put in the extra time right now, and there are people who don’t know how to swing a hammer or to paint. You’ll get an inordinate return as a seller if that property is prepared for buyers,” she said.
Not everyone agrees that smaller homes are a big draw for buyers, however. “If you have kids, then you need a room for in-home schooling,” noted Dr. Gaines. “If both husband and wife are working at home, my guess is they don’t want to work in the same room, so now you need two office spaces and a classroom.”
Evangelou said that the biggest reason for sellers to want to move before the coronavirus pandemic was to be closer to friends and family. “However, the main reason for selling their home during the pandemic is that their home is too small,” she noted. “Thus, during the pandemic, buyers are seeking features that are associated with luxury homes, like spacious yards, home offices, gyms, and private swimming pools.”
Should we expect a surge of multigenerational housing in the wake of the pandemic? It’s difficult to predict, but signs are indicating a shift in how we think about our households.
“According to our Home Buyers and Sellers Survey, buyers who purchased their home after March 2020 were more likely to purchase a multigenerational home at 15%, compared to 11% who purchased pre-pandemic,” Evangelou said.
Another trend that is popular in Vanderhayden’s area: Adult kids returning home to live with Mom and Dad, and working remotely from there.
What changes in 2020 will have the most long-lasting effects on housing in 2021?
More than any other shift, real estate experts said that the increase in remote work opportunities is likely to have the biggest ripple effect on housing for years to come.
“Pandora’s Box is opened,” said Dr. Villacorta. “The increase in remote work will shape every aspect of human behavior for the rest of our lives, in ways good and bad.”
Appleton-Young agreed that “remote work is likely to be the most significant and persistent legacy of the 2020 pandemic.” The need to quarantine and close office spaces accelerated trends that were already underway, and they’re likely to continue, she believes.
“Current estimates expect as much as 30% of work to continue remotely after the crisis passes,” she noted, “which will change where people live, who they live with, and what types of homes they live in.”
Teta opined that the recession is also going to have an effect, particularly on how households and lives have been upended all over the country. “That’s changed how people live, play, and work, as well as their hopes, fear, and concerns about the future. All that plays into how they view buying a home.”
In terms of the home search process, Nothaft said that the technology adoption in real estate search “really came into its own during the pandemic.” Virtual open houses, 3-D tours, and other tools to help buyers and sellers save time and reduce personal contact, have become much more popular, and Nothaft thinks that lower costs and greater adoption moving forward will change how we search for homes.
What’s the good news for buyers in 2021? What will be the challenges?
The biggest piece of good news for buyers moving into 2021 is that interest rates are likely to remain low, making getting a mortgage relatively cheap. “There will also be incentives for long-time homeowners to move from their current homes, which will provide more inventory for the market,” says Appleton-Young.
And the biggest piece of bad news? Homes are not likely to become more available or affordable, which means home price growth isn’t likely to soften. That means bigger down payments and higher closing costs for buyers, as well as possibly dealing with multiple offers on mid-priced homes.
“The biggest challenge will be trying to figure out whether to buy or whether to wait while the pandemic plays out,” said Teta. “Nine years of price run-ups could continue, or they could flatten out. Or reverse. It will be a major challenge for buyers in 2021 to figure out when and where that happens.”
Dr. Villacorta says another piece of good news is that e-closings, e-notaries, hybrid appraisals, and video tours will all emerge to make the real estate process easier, and is succinct about the bad news for buyers. “Real estate is going higher, and you don’t own it.”
What’s the good news for sellers in 2021? What will be the challenges?
Housing demand will stay strong in 2021, so that’s the best news for sellers, but timing that sale might also turn into a challenge for them.
“Home sales are expected to rise by 10% next year,” said Evangelou. “With a high demand and low supply in housing stock, sellers often benefit by getting a higher price for their homes.”
One caveat: The things that are hard for buyers will also be hard for sellers in turn if they don’t have their next living situation lined up, and figuring out when they’ll get peak price for their home is going to be very difficult.
“The low interest rates and continued price gains are wonderful news for sellers, too — at least for the moment,” said Teta. “The challenge will be the same for sellers as it is for buyers, trying to figure out if the boom continues or stalls.”
What’s the good news for homeowners in 2021? What will be the challenges?
Home price growth is good news for homeowners, too, who can likely expect to see some equity gains in 2021. Plus, record low mortgage rates might make refinancing a decent option.
“Home prices are expected to increase 5% next year,” explained Evangelou. “For the typical home, equity increases by $16,000 from a 5% increase in home prices.”
And there’s another challenge to owning a home in this environment, especially if you’re hoping to make improvements: “Good luck hiring a contractor!” said Villacorta.
On the flip side, if home prices drop, Teta explained, this will cut into household wealth and home equity, and the ability to borrow against it “for major life expenses that include home renovations, sending children to college, or buying second homes.”
What’s the good news for real estate agents in 2021? What will be the challenges?
Dr. Villacorta noted that because inventory and transaction volume are both down, “it’s very hard to get listings, so you will need those buyers.” And competition from discount brokerages and iBuyers could be even more acute this year.
According to Evangelou, 90% of buyers use an agent or broker to purchase their home, so those agents should expect to be busy in 2021 with the expected buyer demand. Finding homes for those buyers? That’s going to be the big challenge for agents.
Villacorta added, “if you operate in one of the areas benefiting from ‘the great rebalance,’ and you can figure out a way to market long-distance, you are going to make money.”
Header Image Source: (LinkedIn Sales Navigator / Unsplash)